Much has been made about the absolute failure of the recent advertising-related tech IPOs. As a prime example, the last week of June had one of the worst IPO pricing weeks in history. In fact the pricing conditions were so bad that for the first time in 15 years, five IPOs priced below the original suggested midpoint on the same day. Guess which stock led the weakness on that day?
Amazingly, the fast growth of Tremor Video Inc (NYSE:TRMR) wasn’t enough to offset the weakness from previous advertising-related failures. With the recent collapse of Marin Software Inc (NYSE:MRIN), it probably wasn’t possible for Tremor Video Inc (NYSE:TRMR) to get a fair shake, especially considering the high-profile drubbing that Millennial Media, Inc. (NYSE:MM) had endured over the last year.
While all three stocks focus on different sectors in the shift to digital advertising whether via mobile or videos, all of those stocks share fast growth and weak stocks. Possibly the most shocking of the IPO pricing was the fact that Tremor Video Inc (NYSE:TRMR) recently reported 53% revenue growth in the in-stream video advertising network. So why are investors avoiding the stocks and the sector if growth is that good?
In fact, anybody reading the constant forecasts by eMarketer knows that both mobile and video related online or digital ads are growing at very fast clips. Even more surprising are the valuation metrics of this group. If these were cloud-based software stocks, the group might command valuations at multiples of the current levels.
Online ad tools
Marin Software Inc (NYSE:MRIN) provides a cloud-based digital advertising management platform. Due to the complexity of managing the multiple advertising options, including multiple mobile operating systems and thousands of different devices, the Revenue Acquisition Management platform provides a management solution for search, display, social media, and mobile advertising. For now, search is the dominant revenue sector, but clearly social and mobile are commanding a larger focus going forward.
The stock plunged from a high of $20 on the initial trading day back in March to below $10 by May. The current market value of $400 million is roughly four times the expected revenue of nearly $100 million in 2014. Analysts expect the company to be significantly in the red for a few years, but the company expects profits by 2015. The cash hoard of $115 million should allow the company time to grow into a profitable machine, but most investors will be keen to watch that Marin Software Inc (NYSE:MRIN) remains on a reasonable path to profits.
Independent mobile ad network
Millennial Media, Inc. (NYSE:MM) has been public the longest at just over a year, and the weak returns on this stock have been a primary reason for the negativity on the two that followed in this sector recently. This stock peaked around $28 on the first trading day and didn’t see a bottom until around $6 in April. For the first 12 months, the stock lost nearly 80% of the value from those initial trades.
Similar to Tremor Video Inc (NYSE:TRMR), the company continues to forecast growth in excess of 50%, but it hasn’t stopped the stocks from collapsing. A big issue with specifically Millennial Media, Inc. (NYSE:MM) has been some of the concern around monetizing mobile, though as those have faded it hasn’t helped the stock.
At a market cap of only $750 million, analysts forecast the stock to trade at less than 2 times 2014 revenue, which will grow around 46%. The disconnect between the current valuation and the growth rate is one of the largest in the market. Typically a stock with those growth rates and the projection of being profitable would send the stock soaring towards multiples of at least 4 or 5 times projected revenues.
Video ad network
Tremor Video Inc (NYSE:TRMR) is the most recent of the advertising technology IPOs and had one of the most disappointing pricings in a very weak week. The company originally filed for a range of $11 to $13 and eventually settled for pricing at $10. The stock then opened and closed the first trading day around $8 before sinking below $7 by the fourth trading day.
The company focuses on the technology-driven video advertising segment where its in-stream video grew revenue 53% year-over-year in Q1 from last year. At a market value of around $400 million, the stock offers an interesting value with a revenue base of over $100 million and surging.
Bottom line
This group of stocks provides one of the more compelling sectors to follow as technology and the complexities of social, video, and mobile make advertising ever more complex to correctly target and track campaigns. Considering the quarterly reporting pains that a lot of new IPOs encounter, Millennial Media, Inc. (NYSE:MM) offers the best valuation and stable position in the group. Investors might want to buy that stock and follow the results of Marin Software Inc (NYSE:MRIN) and Tremor Video Inc (NYSE:TRMR) to see if the actual numbers back up the expectations. If that is the case, the market is overlooking two cheap stocks.
Mark Holder and Stone Fox Capital Advisors, LLC own shares of Millennial Media. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Advertising Tech Stocks to Load up On originally appeared on Fool.com is written by Mark Holder.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
