The online local search market is ready to explode in the U.S., and Local Corporation (LOCM) is my pick to be the leader. This ridiculously undervalued stock connects tens of millions of people every month with products and services in their area. With experts valuing the local search market today at $5.1 billion, exploding to over $8 billion in two years, no wonder giants Yahoo (YHOO) and Google (GOOG) are Local's partners. Local's 2012 sales are projected to reach over $100 million, and profitability is around the corner. The market cap is only $60 million.
To see what I mean about valuation, take a look at two similar companies with comparable revenues in the online local search business: Angie's List (ANGI) and Yelp (YELP). I believe the business models of these companies are thin compared to Local Corporation. Angie's List's value is rating local businesses, but I would be skeptical of where those reviews come from -- particularly bad ones that could be fabricated by competitors, or good ones that might come from friends and family.
Everyone going through the Angie's List website is charged a fee, and this has prompted more than a few disgruntled customers to complain. For example, Angie's List claims that service providers appear on the site only after being nominated by their former or current customers and do not buy their way in. What seems closer to the truth is that Angie's List aggressively solicits businesses to pony up cash to be listed. Another truly egregious act I put in the scam category is Angie's List's offer to generate "reports" for the businesses that have joined the website in order to see which of their customers is also on the Angie's List website to, in the website's reasoning, lend a higher level of credibility to the listing business. This looks like a slick marketing ploy, which in reality is taking the business owner's customer list.
Angie's List has been around for 17 years, starting as a business-to-consumer directory. That's a long time to lose money. A look at its financial statements clears up a lot -- it's adding salespeople like there's no tomorrow, which supports our argument that solicitation is fierce. Gross margins might look fantastic at 80%-plus, but with no explanation as to what really constitutes cost of sales I can only guess that it's credit card processing fees that make for a lot of risk if fee terms change. Yet Angie's List holds a market cap of $611 million for a price-to-sales ratio of about 5 times, equivalent to Google.
While Yelp might be a little better, it still doesn't approach the caliber of Local Corporation. I just don't see anything new here. Maybe it's good for finding the best taco in Philadelphia, but, again, who are these phantom reviewers? I tried a little test on Yelp. There's a small New Jersey town I'm familiar with, so I typed it in and checked out some of the categories. It only took a few minutes to discover that two of the six businesses listed on Yelp were, in reality, out of business. One had been shut down for almost seven years. Under "Shopping," the website claims 454 reviewed. Not likely. This is a town of 2,600 people. Incidentally, there were only 30 stores mentioned.
Like Angie's List, Yelp boasts abnormally high gross margins built on credit card processing fees. The company is spending over 80% of its revenue on sales and administrative expenses. Its cash position is good, but that won't help stockholder value if operating expenses are not controlled better. Here's the best part -- Yelp has a market cap of $1.6 billion and trades at a whopping 13 times sales, higher than Facebook (FB).
We're seeing heat in Internet IPOs again. Case in point is Trulia (TRLA), an online real estate market that went public on Sept. 20 at $17 per share, one of the few IPOs whose initial price was raised before the offering. It popped right after trading and sports a market cap of $150 million. Trulia is one of dozens of sites where homeowners can see what's on the market, and offers a mobile application, or app, the hottest addition to search websites. In the online real estate trade, Zillow (Z) is another one. It runs a website of home listings and offers a mobile app for iPhone and Android, and for this service it commands a market cap of $1.2 billion.
It looks to me like monetizing mobile apps is the business to be in. The market is $2.7 billion and predicted to grow to $8 billion over the next four years. Recently, Facebook's stock got a much-needed boost when it announced plans to use some of the $16 billion it raised in its May IPO to develop mobile apps, placing it in the company of Apple (AAPL) and Google in creating the world's largest ad network.
In this respect, Local Corporation is right where the action is. It just announced plans to introduce a mobile app for iOS and Android phones so on-the-go users can search for what they need locally. To me, it makes more sense to have a mobile app for local searches than to check real estate listings.
Going back to value -- what am I missing? Local Corporation has a solid business model created by managers who were at one time or another founders of an Internet company that caters not only to consumers who want to find an auto mechanic or discounts for a health club, and find it fast, but also to local businesses with innovative and inexpensive ways to reach a wider audience. What you have is an intelligent, easy-to-use website that isn't gimmicky and offers practical information, a true media experience, and, now, access to all these great services are right on your phone. I see this is an incredible value to investors since the stock is trading at $2.88 per share, or less than 0.6 times sales.
To illustrate my belief that Local is enormously undervalued, I made a list of next year's revenue estimates for 14 peer companies in the local search and advertising space, including Yelp, Angie's List, Demand Media, (DMD), and ReachLocal (RLOC) among others. The average price/revenue per share, or revenue multiple, of the group is 2.5 times. Applying this to my estimate of Local's revenue per share in 2013, I arrive at a stock price of $12, which is where I believe the shares should be trading today.
Source: Analyst estimates or historical data as of Oc.t 9, 2012, taken from Thomson and Nasdaq.
I always like to make my readers aware of the risks in stocks as investments, and Internet stocks are no exception. Competition is strong and technology changes are rapid. Companies with the "next best thing" today could be relics in three months. Advertising is often tied to the economy. Investor interest can be fickle when it comes to what may only be another Internet fad. I don't believe this to be the case with Local Corporation.
Local is a company that had $98 million in revenues in the last four quarters and is on track to do generate over $100 million in 2012, driven by record overall and mobile traffic numbers. Local is positioned to execute on monetizing mobile better than any other company because of the infrastructure it already has with local businesses in its networks that pay them every day for traffic, ads, and online marketing. With a renewed interest in the Internet and clear value play in this space, I can conservatively see this stock going to $12 by January 2013 based on pure current value -- and even higher based on news and strong earnings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.