Local.com - Part 3 - Investment Outlook

Local.com is expected to generate positive cash flow next year. It just raised $13 Million to raise the total cash hoard to around $20 Million. So, it looks like the company has plenty of cash to stay around assuming the cash requirements do not drastically increase going forward and that the existing businesses continues to provide slow growth. Further, the existing business is projected to bring in revenue close to $30 Million next year. It is growing at a relatively slow rate but at less than 2 times revenue the valuation seems reasonable.

Since the recent excitement is because of IP, it makes sense to look at other small cap companies for whom licensing IP is a business strategy. Two small cap technology companies that come to mind are SCO Group (SCOX) & Immersion Corporation (IMMR). These were chosen because there is wide difference in the IP held by these two. Immersion has a fairly large patent portfolio. They have been successful in generating a good portion of their revenue from IP (see royaties & licenses line under Revenue). SCO Group on the other hand has been unsuccessful in generating significant revenue from IP and from their press releases it is unclear what they actually own. To summarize, even though SCO Group made a lot of noise with little substance, ultimately the stock went down reflecting its business prospects. Immersion on the other hand has seen a steady rise in its stock price. The one thing these two stocks had in common between is the fact that they both saw wild fluctuations in price to both sides over the years as the general public speculated on the value of their IP.

So, what does all this mean to Local.com investors and speculators? – Valuing patents is extremely hard to do. There is every chance that trading in Local.com would continue to follow an up-and-down pattern for an extended period of time – so trading in and out could be a profitable strategy.
- Local.com is valued in the mid-range of small cap companies on an enterprise value to revenue basis. Since the valuation is reasonable, holding the stock long term as part of a strategy to own a small portion of ones portfolio in a speculative but value based holding is logical as well!

Local.com Analysis:
  1. Part 1 - A Patent Speculation Play.
  2. Part 2 - 411 Patent Details.
  3. Part 3 - Investment Outlook.
  4. Part 4 - Analysis Of Another Speculative Upturn.

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