Introduction
Seemingly all-encompassing, the Internet can feel crowded and overwhelming. People keep using it because it provides convenience and cost savings for all sorts of consumer priorities like shopping, education and health care. Leave aside all those delightful puppy and kitty videos. The fact that the Internet attracts 4.95 billion people to screens around the world makes it first and foremost a marketing paradise.
Even more important than a large audience is the digital platform’s unique capacity to encourage two-way conversation. This gives the Internet an edge over print or signage or even voice alone to capture the attention of consumers. Chances are each and every online visitor is receptive to some message or offer and they are thrilled to give feedback. The trick is to figure out just which message will resonate and which will get passed over.
Advertisers can get help from Inuvo, Inc. (NYSE:INUV) The company brings a new level of sophistication to digital advertising with innovative technology that provides critical market information to users without violating consumer privacy. Its flagship product IntentKey is an artificial intelligence-driven application to recognize consumer intent. It has application for broad array of clients, including media and creative agencies, brand owners, and search engines. Disney, Toyota Motors, Microsoft, 23andMe, and Progressive are among numerous leading names that have adopted IntentKey. It is timely for investors to find out why.
Market Developments: ‘cookies’ crumble
One of the most popular methods to deliver targeted messages to Internet visitors is the deployment of ‘cookies’, a text file with bits of data identifying a computer as the user visits Internet sites. The text files are saved in the web browser to keep track of use over time. Information in the text files allow websites to recognize users and recall their individual login information. Cookies are used to customize advertising and target particular consumers who have demonstrated a predisposition for a particular product or service.
Unfortunately, consumers have pushed back on the invasive nature of cookies and have clamored for more privacy. As a consequence, owners of Internet browsers are turning off cookies. Apple’s Safari browser has blocked cookies for years. Google announced discontinuation of third-party cookies in its web browser Chrome by the end of 2023.
Importantly, the discontinuation of ‘cookies’ does not mean the end of tracking Internet interactions. There are other methods, such as local storage or other technologies that save data on a user’s device from the browser they use. For example, beginning in 2019, Facebook began bypassing third-party ‘cookies’ by using a first-party cookie combined with a pixel tracker to surveil European Internet users.
Around the world various jurisdictions are attempting to protect Internet users with data protection legislation. The result has been a patchwork of laws, but the imperative appears to be widespread. A total of 137 out of 194 countries have put into place legislation to secure protection of data and privacy. In the U.S., five states – California, Colorado, Connecticut, Utah and Virginia – have enacted consumer data privacy legislation.
Data privacy is clearly a high priority around the world and some technologies to gather consumer information may not survive. Consequently, Internet browser owners and others involved in Internet messaging are keenly interested in new technologies that keep their platforms viable and effective for marketing messages. It is a market worth protecting. According to Statistica, in 2021, worldwide digital advertising totaled $521 billion in value, and is estimated to reach $869 billion by 2026.
Technology: proprietary solutions protect consumer privacy
Inuvo’s proprietary technology uses artificial intelligence to analyze Internet activity, focusing on possible motivations behind browser searches or content consumption. It is a form of machine learning that scrutinizes visitor interactions with Internet content to predict consumer intent. The technology is capable of responding to over 200,000 events per second. Importantly, the application does not identify any one consumer, track their Internet usage history or store their data.
The technology is packaged in two products – IntentKey and ValidClick.
- ValidClick is a marketing and advertising service for brand owners or consolidators of advertising demand such as search or social advertising channels. Clients can use the information in ValidClick to more effectively place advertising messages on the right websites. Yahoo! and Alphabet’s Google (GOOG) are ValidClick clients with multi-year contracts that resell each click on the service to their advertisers.
- IntentKey helps advertisers reach particular audiences on various devices, including mobile, tablet, desktop, smart-tv or game consoles. Using IntentKey’s intelligence on consumer intent, advertisers can get better return on investment for their ad spend. The platform is embellished with advertising inventory data bought from Xandr, Inc., the advertising and analytics subsidiary of Microsoft (MSFT). IntentKey is available to clients either as software-as-a-service or as a managed service.
Competition: patented technology holds off contenders
Inuvo’s technology is protected by seventeen issued patents and the company has another eight applications pending. This patent shield is valuable given the attractiveness of the market place to competitors. That said, in the near term Inuvo might experience more competition from established players than new technology developers. Indeed, Inuvo management recognizes several possible contenders for their clients advertising analytics budget. For example, data suppliers or aggregators are alternative consumer intelligence sources for Inuvo’s clients. Also, direct marketing platforms and media planners can simplify placement of online advertising. According to management the key to winning and keeping clients is high quality service.
Market Penetration: multi-prong strategy
With so much contention for its clients’ budget in mind, Inuvo has a multi-prong approach to reach prospective clients. The company’s direct sales team targets creative and media agencies as well as brand owners in crafting tailored campaigns that reach goals. The company also relies on integrations with various channels with advertising inventory. Prospective clients fall across a variety of obvious sectors, such as consumer packaged goods, electronics, auto, and financial services. Some prospects may be less obvious such as non-profits or educational organizations.
Inuvo takes a strong message of high return on ad spend to its prospects. The company is focused on players in the ‘open web’ that command about $200 billion in advertising budget. As much as 99% of this slice of the pie is spent by companies that currently use identity-based technology and may be ready for an alternative approach such as IntentKey.
Performance: ramp to profitability
Inuvo has achieved commendable sales growth in the last three years. The company reported a 34% year-over-year increase in revenue in 2021, a nice jump at the topline after a couple of years of sales shrinkage. Revenue totaled $59.8 million in 2021, composed of 49% ValueClick sales and 51% IntentKey subscriptions. The company earned a 73.4% gross profit margin in the years – a high margin as might be expected of a software developer. The gross profit margin declined from 81.4% in 2020, on a shift in sales mix.
Operating expenses in the year 2021, totaled $51.7 million as the company ramped up its marketing effort. Marketing expenses increased 20.7% year-over-year to $33.1 million. The category climbed to 64% of total operating costs in the year. Despite the increase in operating spend, the company was able to achieve a lower reported operating loss of negative $7.8 million. This compares to $8.0 million in the previous year.
Investors should probably scrutinize Inuvo’s cash balance and cash generating potential. In 2021, the company tapped cash resources for $5.3 million to support operations. Most of the cash was used to pay salaries and marketing expenses. Working capital investments also required cash.
To boost cash resources, in the year 2021, Inuvo raised $13.1 million in new capital through the sale of common stock. At the end of the year cash and equivalents totaled $10.5 million. Marketable securities represented another $1.9 million in financial resources.
The cash kitty has come in handy. In the first months of 2022, the company continued to experience fast growth. Sales in the first quarter ending March 2022, were $18.6 million, representing 75.5% year-over-year growth. Operations required $3.6 million in cash in the quarter, soaking up 29% of cash and marketable securities that had been available at the beginning of the quarter. Again, operating expenses and working capital investments were the primary uses of cash. At the present rate of ‘cash burn’, we estimate the company has sufficient cash resources to support operations through the end of 2022.
In a recent interview with this analyst, CEO Richard Howe and CFO Wally Ruiz expressed confidence in reaching positive cash flow and then operating profitability. He pointed to recent successes winning new customers that validates the company’s marketing investment. Another plus is that the company’s data center can process up to two million transactions per second, providing plenty of room to scale up in size without any more significant investment in infrastructure.
Conclusion: undervalued
Proven technology, large and growing market and big-name customers help populate the Inuvo story with all the right players. Growing topline proves strategies to capture of market share are working. However, the plot is really made interesting by a seemingly undervalued stock, at least compared to peer groups.
- INUV is trading at 0.86 times sales and 1.88 times book value.
- The advertising sector is trading at 1.52 times sales while information services trade at 8.21 times sales. A group of Internet software companies command a 16.3 multiple of sales.
- From the perspective of book value, advertising commands a 4.1 multiple time book value, information services 7.64 and Internet software 10.50 times.
Unlike the advertising and information services groups, which are composed of well-established and highly profitable members, the Internet software group averages a negative 2.3% operating margin and a negative 10.4% net margin. It is not surprising that INUV trades at lower multiples than the more seasoned advertising and information services groups. However, a good argument can be made that patent protected technology and a building customer base at least support a price-book multiple closer to its comparable groups.
The peer group comparison suggests significantly higher multiples than recent levels. What catalyst might deliver an adjustment to INUV valuation? Upcoming quarter reports should keep shining a light on successful market penetration and customer capture. Indeed, strong year-over-year comparisons are likely possible in each of the next few quarter reports and that is likely to attract new interest in the shares.
Even with valuation catalysts on the horizon INUV is not for the faint of heart. Expect a long holding period to achieve a return on investment as Inuvo’s business plan is not expected to unfold overnight. INUV price has a modest beta measure of 0.86, suggesting price volatility is not significant. However, the bid-ask spread is 3.1% of the bid price, so investors taking long positions in INUV will need time to recover the spread.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
Underwriters of the Prime series may have a beneficial interest in, serve as agents of, or act as advisors to the companies mentioned herein.