Since going public last spring, Internet advertising company ReachLocal has impressed investors with its fast growth and tremendous future potential – the stock has soared 77 percent.
The recent announcement of a package of services designed to let local advertisers connect with potential customers sent the stock on Jan. 12 to $28.02, an all-time high.
The Woodland Hills company promotes small and medium-size businesses on the Internet. There’s a vast untapped market for its services, and local emphasis is the hottest ticket on the Internet, two factors that have earned it a “buy” rating from all four analysts who follow the company.
“It’s the only pure play in the public markets for local Internet advertising,” said Mark Mahaney, an analyst with Citigroup Global Markets in San Francisco. “If you need proof of the concept, look at Google’s recent attempt to buy Groupon and Amazon’s investment in LivingSocial. There are two smart industry players who think there is business in local advertising.”
Imran Khan, an analyst at JPMorgan in New York, noted in an Oct. 27 report that ReachLocal has offices in 45 cities in the United States, Canada, Australia and the United Kingdom. That leaves plenty of territory yet to fill.
“The company retains significant runway to build out its presence across additional markets, both in the U.S. and in its international operations,” Khan wrote.
ReachLocal held its initial public offering in May at $13 a share. Since then, the stock hit its peak Jan. 12, settling down last week to $23. For the third quarter of 2010, the company reported revenue of $77 million, a 47 percent year-over-year increase.
ReachLocal assigns each customer a consultant who manages the client’s Web presence through the company’s services, which include website design, display advertising and search engine marketing. The company uses geo-targeting technology that allows ReachLocal to track the geographical location of Internet users to bring web visitors to a company’s site, and hopefully into the business.
Zorik Gordon, chief executive of ReachLocal, said the company upgraded its services with a package called ReachCast in December to go beyond search engines and display ads. ReachCast includes a Facebook page, a Twitter account and monitoring where a business has been mentioned on the Internet.
“The technology is coming so fast that these business owners, who are fighting their way out of a recession, don’t have time to figure it out,” he said. “We make it easy to purchase a package so they connect with their customers.”
ReachLocal can update a site by linking to reviews or blog posts, or posting articles and press releases about a business’s industry and products. The site for a plumber, for example, could feature new types of pipes or a lesson on water damage to homes. Fresh content brings more visitors to a site, and that increases search engine rankings.
“Historically, these companies had static web pages, but as we create this content the search engines really take notice,” Gordon said.
Customers pay ReachLocal a flat fee of $1,299 a month for the standard service or $1,799 for premium service. The higher fee buys more content creation for a business’s site. ReachLocal reported it had 17,100 customers in its third quarter filing.
Like many fast-growing high-tech companies, ReachLocal is spending money faster than it makes it. The company reported a net loss of $2.9 million, or 10 cents a share, for the third quarter.
Citigroup’s Mahaney said the company was profitable before it went public, but now is using its IPO windfall to fuel faster growth. He expects the company to come close to breaking even this year and then show a profit.
The company’s main expense is training for its sales force of 700 consultants. Khan at JPMorgan said that they need expertise in web marketing and specific business sectors, and the company has invested heavily for years to develop this capacity.
As training costs diminish over time, Khan believes that ReachLocal’s earnings will improve. He predicts the company’s revenue will grow 40 percent in 2011, while training expenses will only grow 16 percent.
The one caveat to ReachLocal’s future growth is competition. Mahaney said the market opportunity is so large it has attracted the attention of everyone from major corporations to small web designers and marketing consultants.
Lorrie Thomas, chief executive of training and consulting firm Web Marketing Therapy in Santa Barbara, said the biggest competition to ReachLocal are the online yellow page sites, including AT&T’s YellowPages.com. In addition, businesses can perform their own online marketing by going to Google or Bing directly and buying keywords for local searches.
“A lot of businesses have someone at the front desk who could manage the website for less money,” she said. “Could they do it as well as ReachLocal? Maybe, maybe not.”
Gordon at ReachLocal said it doesn’t make sense for a lawyer or a florist to spend time tinkering with Google’s advertising services, such as AdWords. While he sees competitors emerging all the time, he believes the market is big enough for many players.
“When you look at the phenomenal success of Groupon and others, you realize this local ad space is heating up in an aggressive way,” he said.
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