The Mobile Ad Gold Rush
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There’s no doubt that the race for mobile advertising is becoming the next California Gold Rush. Mobile advertising currently represents 1% of the $500 billion advertising industry. And with average forecasts calling for the industry to double domestically by 2015, companies are racing to find the best way to pan for gold.
Google (NASDAQ: GOOG) is currently the leader in mobile ad revenue, holding 18.4% of the market share. Facebook (NASDAQ: FB) also shows promise, with a Q3 increase in ad revenue and operating margins. Even with all their strength, the popular picks in mobile advertising have a few fatal flaws. Google’s market share of the mobile advertising network is expected to decrease in the coming years. Facebook and Pandora (NYSE: P) are only focused on their own platforms and won't capitalize on the huge surge in mobile-everything. On the flip side, Millennial Media (NYSE: MM) is moving towards growth with great diversification. The company has helped platforms, apps, and developers to bring over 45 billion ads to mobile users.
Diversification is Key
There’s no doubt that Facebook has shown viability in marketing ads through their mobile app. But even with Facebook’s popularity, they are panning only one river in the huge gold rush for mobile ad profits. In contrast, Millennial Media shows great diversification in the mobile market. They feature ads on over 7,000 devices, 30,000 apps, and operate with 75 of the top 100 advertisers ranked by Ad Age.
The switch to mobile is not only a domestic phenomenon. Worldwide growth in mobile ad spending will increase over 50% in 2013. Millennial Media is attempting to capitalize on international growth even more by increasing operations in Europe and Asia. They have partnered with a full-service media specialist agency, MediaVest, which will allow for more access to big clients like Kraft, and a surge in diversification.
The Lesser of Two Evils
MM is still seeing negative operating margins. However, MM saw an 88% year over year increase in revenue, without decreasing profit margins. In fact, profit margins have increased from 39.3% to 40.9% YOY. Pandora cannot say the same; the Internet radio giant has seen a 27% decrease in revenue per ad as they’ve increased ads and even driven users away.
Millennial Media also has $122 million in cash to finance any future growth or pad against their currently unprofitable operations. They expect to become profitable in Q4, barely pushing into the black at $.01 in EPS. Annualized growth for next year is expected to come in at $.05 EPS, but this is anyone’s call in an unknown market.
We’ve seen a 17% slip in MM's stock price since the follow-on offering in late October. I don't believe the sale of shares is indicative of any problems within the company. Compared to the overall market, the stock has not seen a significant loss. I believe that it offers a good chance to pick up Millennial Media for the long haul, provided consumer spending doesn’t fall off with the risk of an economic downturn in 2013.
Millennial media has finally started to strike gold and more people are paying attention. Google and Facebook are key players in mobile advertising, but seem too overvalued given their popularity and lack of exposure, respectively. While the company does have a trek before it can see true profitability, I believe that it's a good buy for the long-haul.
Fool Blogger Ryan Gilbert does not currently own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend 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!