This article is the third in a monthly series to analyze the stocks at the forefront of the monetization of the trend toward mobile data traffic. The original mobile monetization index highlighted the leading public companies and defined the concept.
Generally the expectations for the monetization of mobile traffic only increased throughout November following the nice surprise when Facebook (NASDAQ:FB) reported very strong mobile revenue at the end of October. The numbers were shocking because the company is the exact one that originally shot down the mobile advertising industry with its depressing monetization of mobile traffic. Ironically though, the stocks in the sector mostly plummeted regardless.
As expected, the mobile monetization stocks had another eventful month with all but one stock having absolute returns in excess of 10%. As expected, the travel sector had the better returns so far as the sector remains the most profitable. The sectors struggling to produce strong, consistent profits had a rougher month.
In total, the index had another poor month as the market became less enamored with the stocks that reported weak Q3 numbers during November. The majority of the stocks had very negative months that sharply exceeded the small gain of the S&P 500 index. Being extreme beta stocks, it shouldn't be too surprising that these stocks performed at a multiple of the market. After the massive drops, several of the stocks provide better entry points while a few now face questionable futures.
GLUU Total Return Price data by YCharts
TRLA Total Return Price data by YCharts
The stocks helping the shift toward mobile advertising and marketing had a very weak month helping create some of the best valuations in the sector. The feared shift from digital dollars to desktop dimes to mobile pennies continues to push down these stocks irrationally.
Millennial Media (NYSE:MM) - the company operates the 2nd largest mobile advertising network behind Google. After closing October strong after a secondary offering, the stock immediately rolled over at the start of November.
The company reported 88% revenue growth for Q3 with slightly positive earnings that beat analyst estimates by $0.03. Analysts even increased Q4 and 2013 numbers, yet the stock didn't rally.
Though analysts expect 58% revenue growth in 2013, the earnings are only forecast to jump to $0.14. While the company has huge growth ahead, until that growth leads to a larger bottom line investors might not be willing to pay over $12.50 for the stock.
Velti (VELT) - the company operates a leading mobile advertising firm providing for 100% of revenue from mobile traffic. The stock that hit $9 in early October plunged over 50% to close the month at $3.4 on confusing earnings.
While the company reported disappointing earnings, the primary issue was the switch to capitalizing research and development costs, which pulls forward costs. It also announced plans to divest certain assets in Greece and the Balkan States that have extremely long payment terms and limited growth. Outside of these moves, the company reported numbers in line with the potential for higher Q4 EBITDA than originally forecast.
The stock is now valued at less than 1x very profitable revenue, yet the company forecast 35% growth from the continuing operations.
The wireless gaming sector remains one of the weakest sectors at monetizing mobile. While demand continues to expand, the consistently shifting landscape has made it difficult to generate profits. Not to mention, the only focused public company remains very small.
Glu Mobile (NASDAQ:GLUU) - the company remains the leading independent, mobile game developer. Unfortunately the original October warning lead to an even weaker Q4 guidance as the company pushed several releases into 2013 in order to improve the monetization ability of those games. The recently hired executive should help improve the monetization process.
Insiders continue to purchase shares, this time at considerably better prices than the $10M of purchases in October for around $3. During November, few insiders bought around 100K shares for an average price of below $2.30.
The Q4 warnings caused the stock to plunge all the way to $2 making the closing loss for the month of only 10% considerably better than the 30% mid-month loss. Mobile gaming could still offer huge returns though Glu Mobile still needs to prove it will be involved in those gains.
Sector: Real Estate
While the real estate sector remains a strong mobile grower, the stocks of Trulia Inc. (TRLA) and Zillow, Inc. (NASDAQ:Z) both dropped over 20% during the month. Consumers still enjoy using the services via mobile, but investors decided to rationalize the valuations based on Q4 guidance.
Trulia - a leading online marketplace for home buyers, plunged in sympathy with Zillow. The company beat Q3 earnings estimates by $0.08 and reported the first positive adjusted EBITDA in company history. Mobile visitors increased 129% year-over-year leading to 76% revenue growth.
While mobile users grew dramatically, those users still only account for 23% of the 24.9M user base.
Zillow - a leading real estate information marketplace reported earnings that easily beat Q3 numbers, but the company guided down for Q4 and 2013. Analyst expectations for 2013 have already plunged from $0.73 to $0.51 making the stock drop justified. In fact, the stock still trades at over 50x those forward earnings suggesting more downside potential.
Analysts had originally expected Q4 revenue of $32.5M, but the company guided toward only $30M to $31M. Part of the issue is the decision to start offering free foreclosure listings, which will cut down on advertising from Foreclosure.com.
The company continues to see strong mobile usage with over 1 billion home page views for the current year. The new foreclosure listings should only lead to more revenue in the future, but unfortunately the stock was too expensive to disappoint investors.
Sector: Social Media
The social media sector continues to provide mixed results with some of the major players such as Facebook and Groupon (NASDAQ:GRPN) having very mixed results. While Facebook rallied to multi-month highs, Groupon plunged to new lows during November. The smaller and more mobile focused social media plays had similar mixed results.
Pandora (NYSE:P) - a leader in customer-radio internet services, the company hit all-time lows during the month due to more rumors about Apple (NASDAQ:AAPL) entering the sector. The stock though rallied to end the month positive.
The issue still remains whether the company can reduce royalty rates to profitable levels and that all depends on the Internet Radio Fairness act. See more details via the New York Times. The company reported solid Q3 earnings in early December, but guided toward disappointing Q4 numbers. Mobile revenue continues to surge with 112% growth, but the mobile user growth is only leading to higher costs as well.
After the reduced guidance, the stock plunged nearly 20%. Now analysts expect a small loss for fiscal-year 2014. Revenue is still expected to jump 41%, but another year of fast growth and no profits won't help the stock.
Yelp (NYSE:YELP) - the company connects people with great local businesses via more than 33M local reviews up from 30M sequentially. The stock had a 20% decline in November after forecasts for Q4 display ads were disappointing as the company mentioned execution challenges.
The company reported huge 63% revenue growth for the quarter. The mobile apps were used on 8M unique mobile devices leading to 45% of all searches being on mobile.
Analysts still expect over 50% revenue growth in 2013 with slim profits of only $0.03 a share. Some analysts even expect a minor loss. The news is similar to what Pandora reported in early December, suggesting the advertising demand for social media has not improved.
Travel remains a top internet ad generating sector. Even though Kayak Software (NASDAQ:KYAK) was the company that got the buyout offer from Priceline.com (NASDAQ:PCLN), TripAdvisor Inc. (NASDAQ:TRIP) had the better return for the month.
Kayak Software - the company that proclaims itself as the best place to plan and book travel apparently became the best stock to buy out. With one of the leading mobile apps for travel, Priceline.com decided it was worth paying a premium to obtain.
The deal valued Kayak at $40 and not surprisingly the stock has traded in a range between $39 and $41 since the announcement. While Kayak had already created a very valuable brand, it doesn't appear likely that anybody will outbid an offer that values the company at nearly 36x forward earnings.
Priceline.com expects to fund over 70% of the transaction price via stock. The deal will slightly impact earnings in 2013 after closing during Q1.
TripAdvisor - the company provides a travel research platform that aggregates reviews and opinions of members about destinations and accommodations. A major contributing factor to the leading gains in November was the weak October. The stock has been very volatile in 2012 with numerous trading gaps.
The company started off the month with strong earnings that helped push the stock up. The company beat earnings estimates of $0.42 by $0.04. Analysts still expect 19% revenue growth in 2013 with the stock trading at roughly 21x forwarding earnings. At these levels the stock doesn't provide a lot of value, but the company contains a lot of long-term potential.
As a continued reminder, the index was not created as a forecast of the best investments. Rather it was created to track the progress of stocks at the forefront of monetizing the huge amount of traffic moving to mobile and the large amount of data created.
The sectors are quickly being segregated by the ability to profit from the huge growth rates. Travel remains the top profit generator and hence had the best gains. Social media and gaming continue to provide questions on whether costs can ever be held in check.
The advertising and real estate sectors remain stuck in the middle. Profits aren't as much questioned, but the valuations came under attack during November.
Ultimately the expansion of the markets remains unquestioned, but to be successful in the public markets these companies will have to prove a path to sustainable profits in order to see shareholders rewarded.
Disclosure: I am long VELT, GLUU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please consult your financial advisor before making any investment decisions.