This article is the fourth in a monthly series to analyze the stocks at the forefront of the monetization of the trend towards mobile data traffic. The original mobile monetization index highlighted the leading public companies and defined the concept.
The expectations for the monetization of mobile traffic increased dramatically in December following the nice surprise when Facebook (NASDAQ:FB) reported very strong mobile revenue back in October. Analysts continue to become more bullish on the concept.
eMarketer published a report in mid-December forecasting a dramatic increase in mobile ad spending. The agency expects a huge increase in "native" ad formats like Facebook's mobile newsfeed ads and Twitter's Promoted Products.
The company forecast a dramatic increase in 2012 mobile spending from $2.6B in the September report to over $4B now. The new forecast for 2014 is over $11B or a roughly 175% increase from the significantly higher 2012 forecasts. See updated chart below:
Unfortunately a lot of the gains are expected to skew towards the market leaders in Facebook and Google (NASDAQ:GOOG). The question remains whether the demand will filter down to the likes of Millennial Media (NYSE:MM) or Pandora Media (NYSE:P). The firm expects Twitter revenue to now hit $135M in 2012 up from $117M, previously. Investors can play Twitter via GSV Capital (NASDAQ:GSVC) though the company only has a 10% allocation to that investment. See the updated ad revenue chart by company chart for more details:
As expected, the mobile monetization stocks continue to have eventful months. Several stocks had limited volatility during the month though a few stocks still had absolute returns in excess of 20%. The stocks were mixed from sector to sector and even within sectors. The companies struggling to produce strong, consistent profits continue to have rough months, while the stocks with strong earnings potential bounced back from a weak November.
In total, the index had a decent month as the market became more bullish on the mobile monetization theme. The roughly 0.8% gain of the index stocks slightly underperformed the Russell 3000 gain of 1.0%.
The stocks helping the shift towards mobile advertising and marketing had a very mixed month after a very weak November. The feared shift from digital dollars to desktop dimes to mobile pennies took a pause as the eMarketer report suggests that the future isn't bleak after all.
Millennial Media - the company operates the 2nd largest mobile advertising network behind Google. The stock followed a weak November with an equally weak December.
eMarketer expects revenue to now jump to over $138M in 2013 from $115M originally expected back in September. Interestingly, the 20% increase in expected revenue gains had only a limited impact on the stock that quickly dissipated.
Analysts haven't upgraded earnings estimates on the company since the report though it should be noted that the company expects to report roughly double the revenue base in both 2012 and 2013. While unclear whether the analysts already have those upgraded expectations in the numbers, it is clear that the stock could finally gain some momentum in 2013.
Velti (VELT) - the company operates a leading mobile advertising firm providing for 100% of revenue from mobile traffic. The stock plunged over the last couple of months due to a confusing earnings report and divestiture of a weak business. It finally saw a rebound to end the month at $4.5. This move still leaves a lot of room for growth.
The big news for the month was the hiring of the ex-CFO at Sybase. SAP (NYSE:SAP) purchased the company leaving the experienced financial executive needing a quality job. The fact a respected technology CFO agreed to join Velti gave the market some confidence that the company is more than hype.
The stock continues to be 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.
The sector may obtain a second or third entrant in 2013 as either Zynga, Inc. (NASDAQ:ZNGA) focuses on mobile games or Rovio, the market of Angry Birds, goes public. Another possibility is that Kabam hits the public market as well making this sector eventful in the new year.
Glu Mobile (NASDAQ:GLUU) - the company remains a leading independent, mobile game developer. Unfortunately the stock ended the year weak as investors likely sold the stock for tax reasons.
As mentioned last month, insiders purchased significant shares in the last few months that might finally be paying off. The November purchases around $2.25 - $2.30 have so far provided a floor.
Recent game releases have had limited commercial success suggesting Q4 will be at most inline with reduced expectations. The question remains whether new management can improve monetization of the games in development and delayed from Q4.
Sector: Real Estate
While the real estate sector remains a strong mobile grower, the stocks of Trulia (TRLA) and Zillow (NASDAQ:Z) both had subdued months. 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 homebuyers plunged in sympathy with Zillow. The company beat Q3 earnings estimates by $0.08 and reported the first positive adjusted EBITDA in company history. Analysts have increased 2013 estimates to $0.17 from the previous $0.13.
Mobile visitors increased 129% year-over-year leading to 76% revenue growth. On weekends, it sees more than 33% of usage from mobile devices. While mobile users grew dramatically, those users only account for 23% of the 24.9M user base. The company though sells subscriptions for mobile devices that are 25% higher than for the web. Management expects the majority of the business will move to mobile while providing the opportunity to obtain premium rates for that service.
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 now plunged to $0.49 making the original stock drop more than justified. In fact, the stock-still trades at over 50x those forward earnings suggesting more downside potential.
The stock ironically performed better than Trulia that didn't report a warning.
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 for a disappointment.
Sector: Social Media
The social media sector continues to provide mixed results with a rebound in Pandora and a slightly negative month from Yelp (NYSE:YELP). The sector remains income challenged so any rebound might only be temporary.
Pandora Media - a leader in customer-radio internet services, the company hit all-time lows during the previous month due to more rumors about Apple (NASDAQ:AAPL) entering the sector. As in November, the stock again rallied to end the month positive for the second consecutive time.
The stock plunged to start the month after reporting solid Q3 earnings in early December, but guiding towards disappointing Q4 numbers. Mobile revenue continues to surge with 112% growth, but the mobile user growth is only leading to higher costs as well.
eMarketer only forecast slight revenue gains for Pandora in contrast to the other companies in the analysis. The firm forecasts the company losing significant display market share while growing revenue. Display revenue market share could drop from nearly 22% in 2011 to 16.3% in 2014.
Yelp - the company connects people with great local businesses via more than 33M local reviews up from 30M sequentially. The stock flat lined in December after a nearly 20% decline in November. The company forecast disappointing Q4 display ads due partially to execution challenges.
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 $0.02 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 remained one of the top performing sectors. Even though Kayak Software (NASDAQ:KYAK) was the company that got the buyout offer from Priceline.com (NASDAQ:PCLN), TripAdvisor Inc. (NASDAQ:TRIP) continues to perform better.
Kayak Software - the company that proclaims itself, as the best place to plan and book travel apparently became the best stock to buyout. 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. Since Priceline.com expects to fund over 70% of the transaction price via stock, Kayak has the potential for some volatility though it currently trades at $40.
TripAdvisor - the company provides a travel research platform that aggregates reviews and opinions of members about destinations and accommodations. After a strong November propped up by the Kayak buyout, the stock got another surge from the stock purchase by Liberty Media (NASDAQ:LMCA).
The deal gives Liberty voting control of TripAdvisor with 22% of the common stock and 57% of its voting stock. While most investors saw this deal as a bullish sign, the fact that the Chairman sold so many shares suggest a more bearish tone. With the valuation stretched at 25x forward earnings estimates, it could be a sign of an insider exiting at an attractive valuation.
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.
Considering the leading sector of travel appears maxed out for now; it could be time for another sector to leap to the forefront. Advertising still appears to offer the greatest valuation while the other sectors provide a lot of growth potential if the bottom line can be resolved. 2013 appears to be another exciting year for the evolution of the monetization of mobile traffic.
Disclosure: I am long GLUU, VELT, AAPL. 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.