Is Google Really to Blame for Weak Ad-Tech IPOs?

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The recent weakness in advertising technology-related IPOs has reached a level where other firms will likely delay IPO plans. Typically, companies don’t go public when pricing below the original mid-point, yet the sector has seen several IPOs price anyway. Even worse, these stocks have performed badly after pricing, further compounding the problem.

While Bloomberg suggests the online ad dominance of Google (NASDAQ: GOOG) is the leading cause of the weakness in the sector, the Q2 results don’t suggest that any of these companies are being impacted or dominated by Google in any way. Ironically, revenues are soaring, suggesting the prospects are strong, yet the stock prices all plunged. Has the market gotten the sector wrong due to a perceived weakness that doesn’t exist?

Digital ad growth
Whether mobile, social, or digital video ads, the ad-tech start-ups are targeting an estimated $193 billion spent globally on television ads during 2012. Several of the recent IPOs are targeting the digital video ad market expected to reach $15 billion in 2016 with overall online ads reaching $163 billion by 2016.

The market is competitive with venture investors pouring $7.4 billion into over 1,000 ad-tech start-ups. In fact, the weakness led Adap.tv to accept a $405 million offer from AOL. With IPOs firms Marin Software (NYSE: MRIN), Tremor Video (NYSE: TRMR), and YuMe (NYSE: YUME) trading at sales multiples substantially below Google, one has to wonder whether the market is overplaying the threat from Google or other start-ups. 

Revenue acquisition management
Marin Software's Q2 2013 net revenue was $18.2 million, up 30% year-over-year. The company runs a revenue acquisition management platform for advertisers that allows brands and agencies to manage and optimize their digital advertising investments across search, display, social, and mobile. While the majority of revenue presently comes from search, the complexities of mobile and social advertising will be the driving forces behind the growth of the platform.

The company has introduced several product enhancements that enable advertisers to better work with the Google and Facebook ad platforms. The Marin platform allows customers to optimize Product Listing Ads and Enhanced Campaigns with Google and homepage ads, mobile app install ads, and page like ads in newsfeed for Facebook. The ability to work with these two major ad platforms along with other third-party platforms has made Marin indispensable, causing advertisers to increasing sign up with 542 active advertisers now.

Though this IPO was priced better than the other advertising start-ups, the stock plunged after that. The company priced at $14, above the original range of $11 to $13, yet the stock quickly plunged from initial trades near $20 to below $9 within weeks of the IPO. So, even the one successful IPO in the group still failed miserably in the market. After a strong quarterly report, the stock still trades over 10% below the offering price.

In-stream videos
Tremor Video reported Q2 2013 revenue that surged over 40% and easily surpassed analyst estimates. Gross margins increased to 46.5%, as the company has been able to grow revenue and hold down costs. The in-stream revenue segment saw a more impressive 46% growth rate. Adjusted EBITDA jumped to $2 million from a loss of $2.5 million last year.

The company utilizes proprietary algorithms for its VideoHub technology to build decision trees that predicts performance for the chosen key performance indicators based on signals. The technology sorts every video stream into approximately 72 categories, enabling the optimization of a video ad campaign. With the offered transparency into the decision tree, the company has been able to sign up 500 premium websites and mobile applications, over 200 of which partner with it on an exclusive basis.

The IPO priced 7.5 million shares at $10, or slightly below the original range of $11 to $13. The proceeds provided the company with a current cash balance of over $100 million. The decline, though, didn’t stop at the IPO pricing as the stock quickly plunged to $8.50 on the opening day. Eventually, the stock hit a low of $6.81 before rebounding to around $8 now.

Digital videos
YuMe forecasts Q2 2013 revenue to be around $34 million, providing for a 35% increase from last year. The digital technology enables the company to reach 257 million monthly unique viewers around the world. Gross margins are expected to be flat around the same 46% from last year. The company expects a small-adjusted EBITDA profit, though down from the $1.6 million reported last year.

The company uses proprietary technology geared for brand advertisers and professional digital media property owners producing content and applications. The YuMe software development kit is embedded in websites and applications to enable the delivery of video ads, customized interactive ads, and rich media experiences.

The company had the weakest of the IPOs in the group with a pricing of 5.1 million shares at $9 that was substantially below the original pricing range of $12 to $14. In the first week of trading, the stock has held slightly below the IPO price, becoming the best performing stock in the group.

Bottom line
With all three firms showing growth of at least 30%, the theory that Google is impacting the smaller firms in the group appears false. If anything, independence from AOL or Google should help these companies gain traction with brands not wanting to deal with a behemoth that controls other aspects of the market such as online search advertising. The group provides substantially better valuations than Google and other recent tech IPOs that ironically the market doesn’t care whether those stocks are profitable. Typically, 30% growth is enough to warrant valuations of anywhere from 5 to 10 times revenue.

The misconception continues to be that Google dominates in any ad segment outside of search or its own websites such as YouTube.com. In mobile ads, Google only controls roughly 29% of the third-party market and according to comScore, the company struggles with serving commercials in higher-quality video ads.

Investors can buy Tremor Video for the higher growth or Marin Software for a platform that incorporates the surging growth in mobile and social as well. Either way, the threat of Google is highly exaggerated, as Tremor has exclusive deals and Marin helps advertisers work better with Google.

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Mark Holder and Stone Fox Capital Advisors, LLC own shares in Tremor Video. The Motley Fool recommends Google. The Motley Fool owns shares of 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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