Millennial Media: Cheapness in Mobile Advertising?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Within the information technology sector, the marketing services niche is a very active part of our world today. Certain companies have truly proved themselves in the current environment and have rewarded shareholders, while others seemingly have not been able to handle the competition. Companies like Facebook (NASDAQ: FB) and Google (NASDAQ: GOOG) among many others have indirectly put Millennial Media (NYSE: MM) under fire.

Current market

Facebook has grown to be one of the most used social media websites in the world, having a user base of over 1 billion, though shareholders weren't exactly thrilled with it until their last earnings report came out. They blew away analyst estimates, surged prices up 46% in a week, and have continued to exhibit intense market volume. Facebook, like Google many months ago, delivered positive guidance and was quickly reaffirmed by analysts and investors. Since then doubters have become believers in Facebook and have left bystanders in the dust.

On the other hand, Google's shares have been stuck around the $900 range for the past 3 months, but many people believe that it will move into the quadruple digits considering it's one of the most innovative companies in the world. Moreover, massive insider selling by Google's management has yet to deter investors from buying up the stock. 

Millennial Media, (NYSE: MM)(NYSE: MM)is a company that primarily focuses on mobile advertising solutions for other companies in the US and internationally. On their website, they emphasize how they have helped many Fortune 500 companies succeed in mobile. Similarly to Facebook, Millennial Media's IPO was a complete disaster, dropping from $23.50 to $9.05, roughly 61.5%, in just 4 months, which utterly disappointed owners of the stock. From there share prices have moved drastically, hitting a historic low of $5.87 and have continued trending up and down. So the question is does Millennial Media deserve such a low price valuation or not?

Fundamentals

Revenue gradually grew quarter-over-quarter through 2012 from 33 million to 58 million (76% growth for the year) and they did beat their last analyst consensus estimate for last quarter in EPS by $0.01 and revenues by $500k. Free cash flow has fallen significantly, however from October until now it has increased from -$12 million to -$8 million. While these numbers do seem optimistic on its face, but sentiment is seemingly questioning this growth. They still hold virtually zero debt on the balance sheet, another positive factor. Profit margins still remain slightly negative by 2 to 3%. The next earnings report will be announced on Aug. 13 after market hours. 

Analysts

Throughout Millennial Media's entire track history, analysts have given the stock only a buy or hold rating, never a sell, with varying price targets. The current consensus price target is $12.93, giving room for 38% upside potential. More specifically Oppenheimer stated on May 29 that concerns over heavy competition will subside, and the risk/reward is relatively attractive. 

Insiders transactions

According to reuters.com and yahoo.com, there has been strict insider selling since May 13 from management. The argument can be made that insiders can sell for many reasons but only buy for one reason. So to some investors, this might not be overly alarming, however its definitely worth consideration seeing management is only selling. Roughly 241,000 shares were collectively sold by management over the period of July 23, 24, and 25.

Short float

Within the marketing services industry, three companies stand out with very high short float interest. Valassis Communication (NYSE: VCI) has held an approximate 25%, Constant Contact (NASDAQ: CTCT) with 12%, and Millennial Media with 12% as well. Both Valassis Communication and Constant Contact have moved near their 52 week highs but have recently sold off. The bearish outlook for Valassis is most likely attributed to their high debt and stagnant free cash flow. Constant Contact holds a stronger balance sheet, with more speculative shorts based on share price. The large run-ups for these two companies does stimulate the idea of overvaluation, which gives bears the opportunity to get their feet wet. Principally higher short floats can be comforting to a bear since negativity is piling in, yet it can be helpful for a bull looking to find a cheaper price per share.

Bottom line

Overall the industry is booming, it's just a matter if Millennial Media can turn their profits from red to green and continue their expansion. Both fundamental trends and analysts are assuming more future growth for Millennial Media, which will in turn reward shareholders. Although bearish indicators of continued shorting and recent insider selling are red flags. As a side note, Jim Cramer had pumped up the stock as a buy from $6 to $8 claiming it could hit $10 but suddenly changed his position on July 1st, ranking it as a sell. The company does have potential to continue its growth, however being weakened by market pressures, investors should trend lightly before initiating any position. 


Brian Sanders has a neutral stance on Millennial Media and no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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