Why Inuvo Is Growing And Why It Will Keep Going

| About: Inuvo, Inc (INUV)

Summary

Inuvo’s fantastic results are masked by its winding down of its old business.

Inuvo’s new business is exploding.

Inuvo’s EPS is poised to explode.

Little known internet marketing and technology company Inuvo (NYSEMKT:INUV) has been on a tear since shortly after its fiscal second quarter earnings results and conference call. I say "shortly after" because there seemed to have been a delayed reaction to a fantastic report and outlook. As is often the case with overlooked microcaps, it may have taken the street some time to digest exactly what we have here.

For the second quarter, Inuvo reported a revenue drop of 17% to $10.9 million. Earnings were flat at $0.02 per diluted share. At first glance these results look "just OK" thanks to being profitable but lackluster and uninspiring. One has to take a look under the hood to see just how powerful this engine is revving up.

In the beginning of the year, Inuvo announced in a conference call that it is exiting the toolbar business and focusing on mobile. You know - those annoying ad-based desktop toolbars you used to get tricked into downloading years ago and have (hopefully) learned better since? Yes, it's a dying business (thank God). In 2012, Inuvo's toolbar business was $23.4 million in revenue. For 2013, it was slashed by more than half to $10.5 million. For the first quarter of 2014 it was down to about $1 million and for the second quarter all the way down to around half a million.

Meanwhile, the non-toolbar business has been exploding from $30 million in 2012 to $44.5 million in 2013. It continues, especially in mobile, to explode and will lead to more profitable results going forward. You kind of have to look at the non-toolbar business only to realize what's really happening to the company and especially considering that the toolbar business is sort of masking from the street the fantastic results. This mask is your friend because as "masks" get lifted on overlooked names stock prices tend to adjust accordingly.

In the second quarter, the company's "owned and operated sites and applications" revenue grew 31% sequentially or 156% on a year-over-year basis. Mobile revenues increased 122% on a sequential quarterly basis and consisted of 43% of total revenues. This compares to just 15% of revenue attributable to mobile at the start of this year.

Bare in mind Inuvo is not without its risks. The most obvious of which could be a downturn in the economy that may negatively affect its results. Also as a technology company, like most technology companies, Inuvo has to constantly reinvent itself to stay relevant with the times. What is making big money today may not do so in future periods as Inuvo learned the hard way with its toolbar business. Finally, as mentioned in the filings, the company has a "material dependence on [its] relationships with Yahoo (YHOO) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

During the conference call, CEO Richard Howe stated, "We currently expect revenue to continue to grow steadily throughout the remainder of the year." For July or the first month of Q3, Howe already announced that non-toolbar revenue was around $3.9 million or a quarterly run rate of $11.6 million, already significantly above the $10.4 million level of Q2. The July rate is especially impressive considering it is seasonally one of the worst months of the year. The company's 10K stated, "Online consumer traffic is generally lower during the summer months, as consumers spend less time on the Internet."

Later in the call, Howe added, "Looking forward to the second half of the year, we expect revenue to exceed the first half and profitability trends to continue." The only question is just how high that profitability will be but $0.02 per share is a nice base to build on especially since there are only 24 million shares outstanding to split the net income among.

That being said, considering the healthy gross profit margins of almost 60% last quarter along with total operating expenses declining on both a year-over-year basis and a sequential basis, it's quite conceivable that increases in revenue could accelerate the bottom line fast. All things being equal, a $1.2 million increase in sequential revenue at 60% marginal gross profits could mean an increase of $0.03 of EPS for a total of $0.05 for next quarter. A P/E of say 20 for that annual rate of $0.20 could mean $4.00 per share. Inuvo should report next toward the end of October.

Disclosure: The author is long INUV.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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