There has been much talk about an online advertising recovery going all the way back to Google’s (GOOG) last quarterly report where we first saw what appeared to be at least a “leveling off” in pricing trends. Now that most analysts covering this space appear to be expecting a recovery in online advertising spending in the months ahead, should investors consider investing where they spend their time online searching and shopping? It time for investors to put their money where their mouse is?

Such a discussion has to start with Google, the largest player in the online advertising space and the company which is expected to reap the greatest benefit from a rebound in online advertiser spending. Google’s stock traded below $400 in the days leading up to its second quarter earnings report in July where the company reported revenues grew at the slowest pace in the company’s history. Google’s performance in Q2 was widely understood to be hampered by a pullback in online ad spending. Google CEO Eric Schmidt’s commentary in the post report conference call suggested that online ad spending had likely stabilized, but the lower revenue growth and year over year average cost-per-click declines left few ready to call a recovery.

Notable chatter over the weekend about the possibility of a GLU Mobile (GLUU) engagement to a very well heeled suitor. Of course, all the usual suspects are involved - Electronic Arts (ERTS), Activision (ATVI), Nokia (NOK) and even Apple Computer (AAPL). This is not the first time we have heard such, but this time we are seeing the kind of volume that lends much more credence to the talk. With the overall market getting bruised badly yesterday, GLUU shares were up 23% on nearly 10x their prior 10 day trading volume. Such a spike in trading volume is fairly common in the days leading up to a merger announcement and the price action certainly suggests there are investors who want to get into this stock now and do not mind paying up to do so. Past management discussions of sector valuations suggest that GLUU might take a pass on any sub $100 million overtures, so we would expect any deal to price in excess of $3 per share on the low end and we should see the stock continue to trade higher if there is any substance to these rumors.

While we do believe there may be substantial interest from some of these names and possibly a few others, we believe its just as likely that the Street is simply revaluing the GLUU story. With Apple's iPhone set to price at $99 beginning this Friday, there is substantial reason to believe that GLUU's outlook stands to improve markedly between now and year end. We fully expected to see the $99 iPhone price point prior to the Christmas selling season (see 01/12/2009 Seeking Alpha article re: Gluu) and feel it is very bullish for GLUU and other mobile gaming players that the move has been made early enough to allow the "iPhone as a gaming platform" market to develop prior to the big Christmas retail push.

Electronic Arts (Nasdaq: ERTS), one of the largest game software and mobile gaming companies in the world, is said to be considering an acquisition of cross town rival Glu Mobile (Nasdaq: GLUU). While this is not the first time such talk has surfaced, the timing and concurrent market action have added some air of possibility to the rumors.

Glu Mobile is the third largest mobile gaming company behind Electronic Arts and Gameloft, but unlike ERTS and Gameloft, Glu is 100% mobile gaming focused while the other two have significant console based game software offerings. Prior to going public almost two years ago, it was rumored that several firms including ERTS, Activision (Nasdaq: ATVI) and even Apple (Nasdaq: AAPL) were looking to buy Glu prior to the IPO. No such takeover materialized and GLUU came to market at a price of $11.50 per share, giving the company a market cap of approximately $327 million. In the 20 months since going public, GLUU has completed several acquisitions of its own, the most significant of which was its purchase of MIG Entertainment, the largest mobile gaming company in China. Despite showing significant gains in revenues, the company has struggled to reach profitability and its stock has cratered as a result, falling to a market cap below $10 million at one point as worries about its declining cash position and future earn out payments owed to the founders of MIG Entertainment caused investors to punish the shares. As is often the case in a down market, year end tax loss selling begat more selling and before long the stock was trading well below the value of the cash on its books.

Interactive's (IACI) Barry Diller has uncanny timing. Little more than a month before October's bloodletting in the stock market began in earnest, he completed a spin off of the multiple divisions that formerly comprised the IACI conglomerate. Many of those divisions were seen as low growth and / or a drag on earnings that kept IACI from achieving the kind of valuation it deserved. This has proven to be quite fortuitous timing, as it is hard to imagine that the financing necessary to complete these spin offs could have occured if attempted this month instead.

Interactive is now in the enviable position of sitting on a cash hoard of nearly $1.6 Billion that it can use to "go shopping" for technology and content that will add to the potential of the smaller, sleeker and ready to grow Interactive.

It has long been assumed by many investors that acquiring Valueclick (VCLK) would be the first step in "plan B" for Microsoft (MSFT) if its bid to take over Yahoo  (YHOO) was unsuccessful. When MSFT's Steve Ballmer recently ruled out a slew of acquisitions of smaller internet players after pulling its bid for Yahoo, ValueClick's stock seemed to lose some of its "takeover bait" premium over the next couple of trading sessions. Since that time, the sell off in ValueClick shares has intensified and the stock has set new 52 week lows three times over the last week as rumors swirl that it is now hunting for some strategic acquisitions of its own. As might be expected, investors appear to be pricing in 1) concerns over dilution that might accompany any acquisition 2) typical "sell the buyer, buy the seller" arbitrage or 3) that an acquisition is signaling the switch of management efforts to acquiring instead of being acquired.

Much of the chatter regarding ValueClick acquisitions has focused on the possibility of their acquiring a company that would gain them entrance to the "Pay Per Click" [PPC] advertising space, the very high margin business that the Google empire was built upon where advertisers bid for placement in search results that are offered when consumers seek information on specific keyword search terms. This business was invented by Goto.com, which became Overture.com and was acquired by Yahoo and is now Yahoo Search Marketing. This space has been dominated by Yahoo and Google (GOOG), with Microsoft making a late run to gain a foothold in this space and round out "the big three" in the PPC space. While there has always been a "second tier" of companies trying to gain traction in the pay per click space, none have been able to come close to challenging "the big three" for various reasons.

Priceline (Nasdaq: PCLN) is the online travel industry’s best company, as judged by the valuation currently accorded its publicly traded shares. Though Expedia (Nasdaq: EXPE) has a higher total market capitalization, Priceline shares trade at a multiple of trailing twelve months earnings that is nearly 50% higher than the same earnings multiple of Expedia. (PCLN ttm p/e = 36, EXPE ttm p/e = 23).

Atrinsic is a company that was formed by the combination of mobile entertainment company New Motion (Nasdaq: NWMO) with online advertising and performance marketing company Traffix (formerly Nasdaq: TRFX). The ink is just starting to dry on the merger docs (deal closed February 5) and the company’s announcement of a name change to Atrinsic is now a week old. For these reasons, and perhaps also due to the company’s new listing status on the Nasdaq, many investors are not aware of the company or its potential as a player in the rapidly emerging wireless entertainment space.

Miva Inc.'s (MIVA) stock has recently traded down to levels not seen since the depths of the dot com boom. What I find interesting is that this appears to have occurred without any specific negative news that would drive the stock down to such levels. Granted, the most recent quarterly earnings report was a fiasco and investors' discontent seemed justified as the stock sold off from its previous trading range of $4.50- $6 down to the $3 range. However, the recent downdraft that brought the stock below $1.50 seems a bit overdone, particularly in light of some recent developments and the downside protection resulting from the likely value of the company's assets in a merger scenario. The reasons that MIVA could be worth substantially more than its current trading range would suggest are as follows:

1) Miva's "Alot.com" toolbar initiative seems to be gaining traction. The recent PR indicating the number of active toolbar users was a pleasant surprise and the "alot.com" website has seen enormous traffic increases over the last six months. Additionally, the Miva direct owned URL http://www.alot.com is showing increased traffic rankings daily and is now ranked higher (using Alexa's "traffic rankings" reports) than many other better known search portals, ranking considerably higher than even Looksmart.com and Local.com.

Thursday's spike in volume (3x normal volume) and price (up over 10% mid morning) increase looks unusual against the backdrop of a terrible day for tech stocks and the overall market. I noticed there was no news from Marchex (MCHX) that would be a catalyst for such action so I did a little searching and found a few interesting things.

There has been some chatter in the last 48 hours about the possibility of a deal involving Marchex, including two different scenarios:

Regardless of what you think of LookSmart's historical missteps and its recent tendency to fall short of analyst's expectations, a confluence of events the past few days leads us to believe that LookSmart (Nasdaq: LOOK) is severely undervalued and that it should command a market valuation more than double current levels.

Looksmart closed Friday at $2.35 per share, just a little higher than its 52 week low of $2.16 per share. After the close of trading Thursday, the company released Q3 results that were not particularly sterling, but did indicate that the company finished the Q with $37.4 million in cash on the balance sheet, or about $1.63 per share. The bigger news was that LookSmart also announced a contract for the sale of FindArticles.com to Cnet (Nasdaq: CNET) for $20.5 million. Adding the proceeds of this sale to its current cash hoard will result in a balance sheet with somewhere in the range of $56 - $57 million in cash, equal to about $2.45 - $2.49 per share.

While this unfortunate series of events certainly should impact investor’s valuation of THK shares, it appears that the sell off might be a bit overdone. The company’s recent announcement of the hiring of investments bankers to “review strategic alternatives” suggests that THK’s Board of Directors is seriously considering the recent shareholder proposal that the Network division (Kowabunga Technologies) be spun off in an IPO ala EMC’s (NYSE: EMC) recent spin off of VMWare (NYSE: VMW) and United Online’s (Nasdaq: UNTD) pending spinoff of Classmates.com (Nasdaq: CLAS). Should this occur, we expect that Kowabunga would command its own market cap well in excess of $100 million. Given that the current valuation of the entire company is below $100 million and that the company also has a very strong, growing and profitable lead generation and advertising business, it appears that investors may be throwing out the baby with the bathwater.

The main thing we would like see prior to a Kowabunga spin off is greater scale, both on the Kowabunga side and for the assets that would remain with the parent company THK. We expect that the recent affiliate deals with MSFT and CNET will start to ramp revenue significantly in Q3 and that will provide much of the heft we are seeking for the Kowabunga side.

Subsequent articles and commentary from analysts suggest that a LOCM valuation in the $100 million range must be driven by speculation of a buyout premium or that investors are erroneously pricing in royalty payments for the use of the intellectual property protected by these patents. Apparently, this sentiment is highly regarded among some traders/speculators, as the short interest for LOCM is more than double (close to 2 million shares) what it was when we last commented on it.

The following is a direct quote from the letter addressed to CEO Scott Mitchell and the Board of Directors:

Think Partnership’s (hereinafter “THK”) shares continue to trade substantially below what we believe to be fair value. We believe the company’s network division alone is worth 25 -30% more than the entire company’s existing market cap. The valuation trading range for Think Partnership stock leads us to believe that the network division is being wholly overlooked by the investment community because it resides under the THK holding company umbrella. We also believe that the considerable growth prospects of the company’s Kowabunga!, Primary Ads, ValidClick.com and SecondBite.com assets would be significantly enhanced if the company were valued as an independent entity.

The 411 directory service is an $8 billion per year business that has recently received much attention from the venture capital community as well as several large technology companies, with new entrants including Microsoft's (MSFT) 1-800-555-TELL , AT&T's (T) 1-800-YellowPages and Google's (GOOG) 1-800-GOOG-411.

The most significant among independent companies in the space is Jingle Networks, which claims to have already taken over 3% of the market. While it is difficult to place a hard valuation on the value of Local.com’s patent that appears to cover the monetization model that appears to be used by each of these players, we can certainly take note of the valuation accorded to Jingle Networks of $150 million + in its last round of venture capital financing. We note that this round of financing occurred at a time when Jingle Networks was not profitable and had taken only about 1.5% of the total market for 411 directory services.

In the online search market, there may be a company that is now positioned to profit handsomely from a similar model. With very little fanfare, micro cap search upstart Local.com announced this week that the US Patent and Trademark office has granted patent #7,231,405 for the process of indexing and retrieving web-related information by geographical location. That the news was not on the front page of the Wall Street Journal is not all that surprising, very few happenings related to companies with such a small market cap get the attention of Wall Street commentators or analysts. However, I think the situation at Local.com bears watching and could turn into a very interesting story.

On its face, such a deal makes sense, as MSFT has given us good evidence of their intent to be a player in this space with their $6 billion acquisition of AQNT. Additionally, the value in VCLK’s assets are very complementary to the assets of aQuantive (AQNT), with very little overlap. Remember that these two almost merged last year for this very reason.

I believe that the $4 billion + price that would likely be necessary for a purchase of VCLK will make MSFT consider other alternatives, including a very small player in this space that has built a technology platform that has attracted some high profile customers, some whom have actually migrated from ValueClick.