I’ve been following and trading in and out of ABTL for years. My latest recommendation to buy the stock was last August at around $0.50. The shares now trade for around $0.80 and again represent an interesting investment opportunity.

Though ABTL’s losses continue unabated, improving auto sales trends and a significant shift toward higher margin internally-generated leads could send the shares much higher in 2011.

What Changed Here?
Over the past few quarters ABTL’s main business of providing auto leads, has been shifting dramatically from third-party sourced leads to internally generated leads. Quite simply, reselling leads from third parties is a very low margin business, when compared to selling your own internally generated leads.

This change in ABTL’s lead mix, is reflected well in the fact that in 2009, 6% of the leads were generated internally, while by the end of the 3rd quarter 2010, internally-generated leads were approximately 39% of total leads. Moreover, the company is projecting 65% internally-generated leads in 2011. This is primarily because in September ABTL acquired Cyber Ventures, Inc. and Autotropolis, Inc. for around $15 million.Cyber Ventures and Autotropolis, Inc., through proprietary content website generate consumer automotive purchase requests, i.e. leads. Cyber Ventures and Autotropolis had 2009 annual revenues of approximately $10 million.

Jeffrey H. Coats, Autobytel’s President and Chief Executive Officer, explained the acquisition thus:

“Given our already large and growing auto dealer and OEM distribution network, the addition of Cyber Ventures and Autotropolis gives Autobytel a significant competitive advantage by providing us with an additional major source of high-quality, ready-to-buy consumer purchase requests coming directly from our network of branded consumer websites. We expect our higher-margin, internally-generated purchase requests to increase by upwards of 150%, and our total purchase request volume to grow by more than 40%.”

What May Happen?
As ABTL’s overall percentage of internally-generated, high-margin leads grows, and revenues expand due to organic and acquisition-fueled growth, financial comparisons should be favorable thoughout 2011. As more investors discover ABTL’s much improved financial profile, the shares should rise. In addition, acquisition activity continues to heat up in the Internet space and with an improving financial situation, it’s possible ABTL will become an acquisition target.

Risk/Reward
With a net cash position, a stable base of around $52 million in revenue ($62 million including the acquisition), an improving auto market, and the continued negative investor sentiment towards ABTL, I don’t see much risk in ABTL’s share price at this level, which is still way beneath five year highs of over $3. At the same time, on the upside, and from a very simplistic analysis (“Occam’s Razor” valuation), it’s interesting to note that ABTL bought Cyberventures for around 1.5X Revenue. At a similar valuation, ABTL would trade at around $2 per share. Interestingly, the owners of Cyberventures took warrants in ABTL at $0.93 per share.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in ABTL. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.