The Microcap Speculator

For the past few months, I have had an ongoing dialogue with a reader who is close to Modavox (MDVX.OB). He’s a large shareholder, so assume that he is talking his book. But the story is certainly worth looking into.

Modavox has two main businesses:

1. Broadcast Media - basically just internet talk radio. This division was responsible for about 80% of revenues last quarter, but its not where Modavox’s future lies.
2. Interactive Media - provides behaviorally-targeted advertising solutions and interactive e-learning platforms.

The numbers in a vacuum are not inspiring. For the first three quarters of its 2007 fiscal year, Modavox inked $2,531,779 in revenues, compared to $2,000,255 in the prior year, and lost $650,207, compared to a loss of $397,491 in 2006. At this run rate, Modavox has an enterprise value-to-sales ratio of 17.85, well above Google (9.11), Apple (3.44), and most other high flyers. Plus, its not profitable. Viewed without context, these numbers give little reason to get excited.

But with this stock, the context matters. Modavox has a few broad patents covering, among other things, behavioral targeting of internet ads. It has already brought a patent infringement suit against Tacoda, now a division of AOL. My source believes that scores of internet businesses could also be infringing on the patent portfolio. Think of Tacoda as a test case. If Modavox prevails and its patents are upheld, Modavox could be the next big patent licensor - the Patriot Scientific (PTSC.OB) of internet advertising. And unlike Patriot Scientific, Modavox is actually practising the technology so it shouldn’t be disadvantaged by last year’s Supreme Court ruling in KSR v. Teleflex.

The technology also could make Modavox an attractive buyout candidate. Both AOL (Tacoda) and Yahoo! (Blue Lithium) have recently bought behavioral advertising companies. I’m not sure if Modavox’s business has sufficient scale to justify a buyout, absent the patent bludgeon. That is why I’m focusing on the growth of the Interactive Media division. Revenues are very small now, but substantial growth here will likely be rewarded by the market and attract suitors.

Despite the potential, I’m not a buyer (yet). Modavox is overextended, and the potential patent and buyout catalysts may take some time to develop, if they do at all. For now, MDVX is on my watchlist. If you have anything to add on Modavox, please leave a comment.

DISCLOSURE: No position.

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After months of enduring a slow drip downwards, battered HandHeld Entertainment: ZVUE shareholders are getting some relief today. Shares of the microcap online video aggregator and MP3/MPEG player manufacturer shot up after comScore labeled ZVUE the fastest-growing internet property it tracked: “In a news release issued Sept. 18, comScore reported that HandHeld had the largest increase in unique visitors (U.S.) by 327 percent month-over-month from July 2007 to August 2007.”

The actual news doesn’t really match the headline. ZVUE achieved that feat not through real growth, but rather because comScore changed the way it tracked ZVUE’s various websites: “For the first time, comScore is now measuring all of HandHeld’s Web sites as a single entity, a move that coincides with HandHeld’s formal launch of ZVUE Networks, its online video advertising network.”

Bottom line: ZVUE may be growing its websites, but I’d like to see real statistics, such as actual pageviews and revenues across the site compared with the same statistics for the prior month or quarter, rather than the useless apples vs. oranges stats announced today. Still think that any future this company has resides in the websites, and it should ditch the money-losing hardware biz asap.

DISCLOSURE: No position.

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1. Commerce Planet: CPNE.OB announced this morning a letter of intent to acquire Iventa, an online web builder based in the United States that also has a 30-person web services staff in India. The announcement was long on strategy and short on details. The company says that “the acquisition of Iventa’s Dashboard System(TM) platform will rapidly accelerate Commerce Planet’s expansion into the B2B business sector by leveraging Iventa’s existing customer base which consists of leading companies and brands in many industries including entertainment, publishing and media. In addition, Commerce Planet will be able to immediately offer Iventa’s software to its customers that are currently using its top producing consumer direct product, Online Supplier.” Unfortunately, the terms of the deal were not disclosed, and critically the company did not say the deal will be accretive (which means it probably won’t be).
2. Global Aircraft: GACF.OB announced that its CEO would remain at the company and would assign his interest in Global Aircraft Leasing Partners to the company, eliminating a serious conflict of interest. Also, Global Aircraft is almost done untangling the mess from its dealings with BCI. It received the sixth aircraft pursuant to its settlement agreement, and will receive $1.6 million in funds recovered from the Delta bankruptcy.
3. Gold has made a major move in the past few days, reversing a false breakdown from a multi-month coil.
   Now, judging by the december futures, gold is approaching the top of the coil with a head of steam. The declining trendline could prove to be resistance again, but I suspect we may be near a major breakout. I remain heavily long junior gold miners like Goldenstar Resources: GSS and Western Goldfields: WGDFF.OB.

DISCLOSURE: No position in GACF.OB. Long CPNE.OB, GSS, WGDFF.OB.

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John Gilliam (via Seeking Alpha) suggests that Think Partnership: THK should build scale in its internet lead generation business by buying Commerce Planet: CPNE.OB:

A THK/CPNE marriage would be a good fit for several reasons including the synergies resulting from each company’s strong presence in the “home based business” lead generation space and the potential for THK to leverage the very low cost fulfillment infrastructure already built out by CPNE. Probably the greatest benefit from such a merger would come from THK’s unique ability to address the only apparent significant operational issue that has recently plagued CPNE. In its last 10Q, the CPNE CEO disclosed that the company’s very profitable affiliate program channel had experienced some issues related to affiliate fraud / chargeback scenarios that might limit the company’s willingness to use that channel that had been so productive in the past. Think Partnership’s patent pending fraud prevention technology (ValidClick) that is integrated with its Kowabunga affiliate platform could curtail such issues and allow the company to operate in that channel that allowed them to book profits in Q1 2007 that were about 50% higher than they were before or after.

Joining THK’s direct division with Commerce Planet would double the size and profitability of THK’s direct division and enable it to have the scale to be among the most significant players in the lead generation space. It appears that THK could offer a premium of more than 100% of CPNE’s current stock price and still have a deal that is highly accretive. Further, bringing the CPNE assets into the fold would create another significant revenue stream for Kowabunga’s click fraud free affiliate network and possibly other THK divisions due to CPNE’s spending over $10 million per year for online advertising.

I agree with Gilliam’s general proposition that internet lead generation companies are undervalued, and as a shareholder I would welcome “a premium of more than 100%.”  Strategically, if and when the economy slows, lead generation for home business opportunities (a focus of both CPNE and THK) should become more valuable. The possibility of a combined entity is intriguing, but keep in mind that there is no evidence the companies are presently considering a merger.

DISCLOSURE: Long CPNE.OB; no position in THK.

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