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INUV: Combined Company Could Trade At a Much Higher Valuation

11/08/2018
By Lisa Thompson

NYSE:INUV

READ THE FULL INUV RESEARCH REPORT

Inuvo, Inc. (NYSE:INUV) has entered into a definitive agreement to be acquired by privately held ConversionPoint Technologies, Inc. for cash-and-stock valued at approximately $2.22 per share or $75.7 million, well above its previous market price of $0.41 per share. Inuvo shareholders will receive $0.45 per share in cash, and stock valued at an estimated $1.77 per share, or approximately $75.5 million in total consideration. ConversionPoint plans to file a Form S-4 with the SEC to register the shares of common stock to be issued in the acquisition and intends to file listing applications for its stock with the NASDAQ Capital Market and the Toronto Stock Exchange. We expect a seamless tax-free transition for INUV shareholders with INUV ending trading on one day and ConversionPoint opening trading the next day under a new ticker.

Inuvo reported earnings and had a conference call with investors that included the management of both companies. They explained the reason for the merger is not only synergies between the two company’s technologies and capabilities which complement each other and create additional revenue at minimal cost, but an arbitrage on valuation between the two. Here we encounter the difference in private and public company valuations and positioning. Inuvo is being purchased by ConversionPoint for approximately one times sales, while ConversionPoint has been valued at many times that due to its growth rate and its market positioning as an eCommerce platform compared with high flyers like Shopify (SHOP), LiveRamp (RAMP) and The Trade Desk (TTD.)

We know little about ConversionPoint Technologies’ financials at this point we do know it was recently valued at $146 million in a $15 million private company round and it generated $50 million in sales in 2017 and is rapidly growing. If we guesstimate it is doing $75 million this year that is twice sales and twice the valuation metric used for Inuvo which has been offered approximately one times it sales. The combined company hopes to emerge on the public markets repositioned as a comp to Shopify, LiveRamp and The Trade Desk, all of which trade over ten times enterprise value to estimated 2018 sales. Should the merger be successful, there should be considerable upside for investors. Even at two times sales, at a $300 million enterprise value and 22 million shares outstanding, that would be a $13.64 per share. Keep in mind that as part of the transaction the combined company seeks to raise $36 million which is a requirement for the deal to close and will slightly dilute current shareholders. Inuvo will do a filing in the next few weeks that will provide financials on ConversionPoint including pro formas. The deal is expected to close in Q1 of 2019.

ConversionPoint describes itself as an eCommerce technology company changing how brands, advertisers, and agencies connect with, acquire, and retain customers. Powered by AI-enabled media optimization, CRM, and robust post-purchase platforms that automate product delivery and remarketing, ConversionPoint offers proprietary technologies to increase conversions, lifetime customer value, and return on ad spend. ConversionPoint focuses on the non-Amazon channels, including Walmart.com, Shopify.com, and BigCommerce.com. Management has identified a number of specific near-term opportunities by combining with Inuvo, including upselling Inuvo’s high-margin AI powered IntentKey media to ConversionPoint’s existing enterprise customers and online retail partners, as well as integrating ValidClick and creating a new traffic acquisition source for them.

Q3 2018 Results Show Sharp Decline in its Publisher Business

Q3 revenue disappointed as the company saw a sharper drop off in the supply, or publisher side of its business than it expected. The company has been deemphasizing this segment as it is not important to its long-term strategy, especially in light of the pending acquisition and has instead been directing resources to grow its higher-margin demand business with the IntentKey. In addition, the prices paid per click by Yahoo have fallen off in the quarter and have not recovered. The company reported revenues of $16.8 million down 17% from the $20.3 million reported a year ago.

Margins improved versus last year with gross margin before marketing expense again at 63% the same as in Q2 and up from 52.5% a year ago. After marketing spend, the margin declined significantly to 13.8% versus 17.3% and 18.8% last quarter.

Expenses increased to $12.0 million versus $11.6 million a year ago, and operating losses increased to $1.3 million versus $0.9 million. Head count increased to 68 from 64 last quarter and 92 at the end of March.

The GAAP net loss for the quarter was $1.4 million versus $1.0 million a year ago. GAAP EPS loss was $0.04 vs. $0.03, but on a non-GAAP basis the loss was $0.04 versus $0.02 last year.

EBITDA for the quarter was a loss of $386,000 versus a positive $253,000 a year ago. For the first nine months of the year EBITDA was a loss of $195,000 versus a loss last year of $243,000.

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