Local's Deal With Microsoft Drives Real-time Value

Sep. 08, 2013 11:51 PM ETLOCM, MSFT, GOOG, AABA
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Ray Dirks has been a respected analyst on Wall Street for decades. Ray has written two books,” The Great Wall Street Scandal” and “Heads You Win, Tails You Win”, published by McGraw-Hill and Bantam Books respectively. Dirks opened his own securities analysis firm after gaining much attention in the financial press during the 1970s and 1980s. Ray earned his place in the history books while working as a securities research analyst. He got a tip from a disgruntled employee of a company called Equity Funding that this firm had built its business model upon massive commercial and accounting fraud. Most research analysts on Wall Street took Equity Funding's numbers at face value, and recommended the stock. Dirks, however, began his own investigation, found the tip credible, then warned both his firm's top institutional clients (who sold out their positions) and the SEC. He also tried, unsuccessfully, to interest The Wall Street Journal in the story. It turned out that the tip was right, and Equity Funding eventually collapsed in a manner that would prefigure some of the scandals that have been seen on the Street today.

Local Corporation (OTC:LOCM) just signed up one of the world's largest technology companies to provide location-based data for shoppers looking for products and services, something Local does best. In a deal finalized last week, Microsoft (MSFT) will use Local's Krillion shopping data platform to power its own search engine, Bing, for consumers doing local searches for categories of products that drill down to brands, retail stores, and availability. Krillion is a revolutionary real-time local product search platform that lets buyers find what they need in their immediate vicinity, saving time and money. It was acquired by Local a little over two years ago and is already paying for itself.

Shares of Local jumped 41%, to $2.30 on the news, then settled to $1.95 at the close on Friday, still an 18% gain.

Microsoft is not the only big tech company after Local's expertise. Google Inc. (GOOG) is Local's largest ad partner accounting for 44% of total revenue in 2012. Yahoo! Inc. (YHOO) is next, supplying 21% in the same year. These are long-term partners who together own the search engine space - Google's market share is 67% in the US and Yahoo is 11%.

Bing is big, too, and growing with a market share of 18%, rising from 16% a year ago. Bing offers millions of users: news, maps, video, mobile, images, and tweets. Local listings are becoming more important to monetize because that's where ads get the most attention, and that's where Microsoft wants to be. With Microsoft on board, Local will be in partnerships with search engines that own 96% of the US market. Worldwide figures are even bigger.

Online search for products and services is important to today's consumers. Research matters to them before they use gas to go from store to store. Studies show that shoppers doing local searches on the Internet tend to buy more often because they have a mindset ahead of time, instead of just browsing at the mall. That's why advertisers pay big money to put their ads in front of local searchers on websites like Local.com. Also, Local does a huge service to small and medium-sized community businesses because it allows them to compete on a national level, something they would never have had the resources for in the past.

This deal is good for Local, but it is also very good for Microsoft, who has been struggling with Bing and other products like the new X-Box One that industry watchers say may not make breakeven in its first year of sales. Bing has a tainted history - when it was launched in 2009, there were complaints about a bug that forced users to default to it, destroying trust in the software titan. Microsoft needs a local search engine to kick-start Bing, appeal to consumers, and gain market share. Local's solution is the answer.

The biggest risk to Local had always been competition in location-based online search, from firms like Google, Yahoo and Microsoft. Now all of these companies are partnering with Local who want to use its knowledge base in local search and, eventually, in capturing mobile ad revenues.

Bottom line - Local's technology is attracting attention. They have firm footing in two major markets - the $42 billion online advertising industry and local search, expected to be $14 billion in three years. Financial performance has been phenomenal, causing them to raise revenue guidance for 2013 to between $95-$97 million, with EBITDA of $5.4 million this year. The key to Local's growth is expanding their reach of monthly unique visitors and how much ad revenue they make from those users, two figures that are growing quarter to quarter. A partnership with Microsoft can only add to this expansion. With a low valuation and lots of promise, I believe Local is a stock to buy now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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