Is Local.Com (LOCM) The Next Big Internet Stock?

With established Internet stocks such as Amazon, Google, and EBAY rallying again, and huge Initial Public Offerings (IPOs) of well known Internet companies such as Facebook, Twitter, LinkedIn, and Groupon competed or pending, it appears that the second Internet stock mania is well underway, which leads to the question: Is Local.Com (LOCM) The Next Big Internet Stock? Unlike the first Internet stock mania that occurred in the late 1990s, the current rally in Internet stocks may be sustainable because many of the established Internet companies are either profitable or on their way to profitability, and many of the new Internet company IPOs have proven business models.

People who trade stocks in the stock market are always looking for the next big stock before it makes a big move higher. Sometimes it is a good idea to look at a whole sector in the stock market that is rallying and try to figure which company’s stocks have not yet participated in the sector rally. While the first tier Internet stocks are in rally mode, many of the second and third tier Internet stocks, such as LOCM, have failed to participate in the rally in any meaningful way.

Google (~66%), Yahoo (~16%), Microsoft’s Bing (~14%) have pretty much cornered the Internet search market, with one large exception, local search. Local businesses and advertisers have found these global search engines to be too widely focused to be effective for them in their efforts to raise local awareness of their businesses, which has created a perfect market niche for companies, such as Local.com, which trades on the NASDAQ stock market under symbol LOCM.

Local businesses have come to realize that spending thousands of dollars to advertise a local business to the entire world via the Internet is not a prudent use of scarce advertising dollars. Local.com has found a solution to this problem, by keeping the search and advertising local to a particular area, thus charging less for a targeted advertising campaign that features ads on their website and on other websites such as Yahoo.com.

Local.com is a network of thousands of local search engine websites that serve the United States and the United Kingdom. The power that Local.com has is the fact that it is focused locally, so advertising can be targeted to a local area to reach customers that are within reach of a local business, which is a more effective way for local businesses to advertise to local customers. An Internet user uses Local.com to search for a local restaurant or business, and both paid listings (advertisements that look like listings) and search listings are displayed. Local.com not only offers contact information, directions, and maps for the local restaurant or business found in a search, but also provides reviews from throughout the Internet.

How does local.com provide local search results? According to their website, “Local.com uses a combination of our proprietary Keyword DNA™ and geographic web indexing technologies to provide relevant search results for local businesses, products and services”.

Local.com offers coupons for local restaurants and businesses, which puts them in competition with Groupon.com. Local events and recreational activities are also listed on local.com. In similar fashion to Yahoo.com, Local.com offers articles about lifestyle and personal help subjects, such as: food, wellness, fun, household, shopping, and finance.

Ultimately stocks rise or fall based on the underlying company’s financial performance. Local.com was founded in 1999, and like many start up Internet companies that require a great deal of capital to get their online businesses off the ground, profits were non-existent in their early years. However their bottom line turned positive in 2010, when Local.com reported its first annual profit of $4.2 Million.

In the second quarter of 2012, Local.com expects revenue to be $27 million and adjusted net income of $150,000. Local.com expects increased adjusted net income in the third and fourth quarters of 2012. For all of 2012, Local.com expects top line revenue growth of 40%, which translates into approximately $110 million in revenue for 2012. Local.com is looking to earn between $1.1 million to $1.3 million in 2012. Not huge earnings, but positive nonetheless.

Local.com is using cash flow to expand their local deals site (launched on May 2, 2011) called Spreebird.com and to integrate the Rovion acquisition, which will impact near term earnings.

Perhaps the most compelling part of the Local.com story, besides the growing revenue and recent profits, is the valuation of Local.com compared to its peers in the Internet space. With a market capitalization (which means how much the company is worth based on the current trading price times the number of authorized shares) of slightly over $50 Million dollars, Local.com is trading just half of their current sales. A comparison of Local.com’s (LOCM) valuation to high flying Internet stocks such as Opentable.com (OPEN) and Travelzoo.com (TZOO) illustrates how undervalued Local.com might actually be (or perhaps how overvalued OPEN and TZOO are). OPEN has a $2.60 Billion market capitalization (over 25 times LOCM) on 2010 revenues of $99 Million, with revenue growth similar LOCM. TZOO has a $1.39 Billion market capitalization (over 13 times LOCM) on 2010 revenues of $112.7 Million, with revenue growth much slower than LOCM. Both OPEN and TZOO were profitable in 2009 and 2010, with 2010 earnings of $14.1 Million for OPEN and $13.1 Million for TZOO.

With similar revenues as Opentable.com and Travelzoo.com and profitability, it is not hard to extrapolate that Local.com may someday trade at similar valuations to its peers. Perhaps Local.com has to prove that can consistently report earnings on its growing revenue before market participants start valuing Local.com in the same league as Opentable.com and Travelzoo.com. One advantage that Local.com has over Opentable.com and Travelzoo.com, is that since it is a search engine instead of a niche business, Local.com has greater opportunities to diversify its business as market conditions change and new opportunities arise, which brings us back to the question: Is Local.Com (LOCM) The Next Big Internet Stock?.

Disclaimer: This article is for informational purposes only, and is not a solicitation to buy Local.com's stock LOCM. Adequate due diligence should be performed before any investment decisions are made.