Back in August of last year, Stone Fox Capital wrote about the continuous decline of Zipcar's stock. The stock had traded down to $6 in a steady and unrelenting decline since going public around $30 back in 2011. The stock had become so punished that it wasn't long before Avis Budget Group (CAR) came knocking with a $12.25 per share offer in cash that gave bottom feeder investors huge gains.
The latest action in Millennial Media (MM) is starting to replicate the action of Zipcar. First and foremost, Millennial Media traded at the highs out of the gate and followed the path of Zipcar with non-stop declines. It's debatable which stock had the worst chart. Second, the investment concepts remained intact despite the precipitous declines. Investors feared higher competition and delayed profits in pushing the stocks to incredible lows, yet the thesis of car sharing and mobile advertising both remain strong. Third, the valuations became so cheap that the companies became buyout targets. With Zipcar, the case is already closed after Avis came knocking with a solid bid. In the case of Millennial Media, investors could wake up to a whole host of companies making an offer.
Millennial Media remains the leading independent mobile ad network provider. Its technology, tools, and services help developers maximize their advertising revenue, acquire users for their apps, and gain insight about their users.
Should Yahoo Make A Bid?
Predicting buyouts can be a fool's game, as the most logical and rumored deals tend to never get done. Instead the out of the blue mergers catch most investors off guard.
Over the last several weeks, Yahoo (YHOO) has been rumored to be on the acquisition trail with mobile advertising technology as a prime target. Strangely, these rumors have done nothing for Millennial Media stock, as it has plunged to new all-time lows in the face of the possible bid. The odds of a buyout appear slim to none based on the stock action
It makes perfect logic for Yahoo to be aggressive in the advertising medium of the future. The company is already amongst the leaders in desktop search and display ads competing against Google (GOOG), and the purchase of Millennial Media would place the it squarely in the sights of Google's leadership in the mobile space. Not to mention, the market is looking for a mobile ad network that isn't linked to the leading mobile operating systems. The new Yahoo could play the perfect to host to developers and marketers looking for an ad network not tied to the Android and iOS owners.
Horrible Post-IPO Action
Sadly, Zipcar and Millennial Media are two stocks that make for a good contest of the worst IPOs of legitimate companies. Guess that depends on whether one counts Groupon (GRPN) as a legitimate business. Besides that debate, these stocks both traded down immediately out of the gate and never recovered.
Millennial Media opened at $25 on March 29, 2012 and soared to a high of $27.90 that day. The stock ended up closing flat and the collapse began on the second day. After closing at $23.50 the second day, it eventually plunged to the $16s within a month and the $9s by the end of July. After a strong rebound going into the Q4 earnings report on February 19th, the stock dropped a jaw dropping 38% on perceived disappointing guidance for 2013. Even though that $8.95 close appeared bad enough, the stock continued plunging until hitting a low of $6.27 last week. See chart below:
Zipcar held up better from the start, hanging around $30 for the first week before to plunging below $20 within two months of the IPO. The stock first hit the eventual buyout level back in December 2011 and finally broke below $12.25 for good in May 2012. Zipcar had a similar jaw dropping day in early August of last year as the stock plunged over 30%. The stock eventually traded below $6 before a huge rally to above $8 that preceded the buyout. See chart below:
If one uses Zipcar as a template, the Yahoo buyout isn't even in the cards at least yet. That stock had hit 5-month highs before the official news suggesting a possible leak. It also suggests that the $6 level on Millennial Media could've been the ultimate buy point as investors became overly pessimistic similar to the Zipcar mess. Remember that Avis paid more for Zipcar than the price prior to the jaw dropping move in August. Anybody buying Zipcar stock into that panic made substantial gains in a few short months.
While an exactly similar move isn't likely, a similar deal would value Millennial Media in the $12-14 range.
Valuation Makes A Difference
As with any investment vehicle, price eventually matters, whether a stock gets overpriced such as the IPO levels on Millennial Media and Zipcar, or the cheap valuations compared to revenue at the bottom.
Zipcar was eventually bought out for slightly below 2x revenue. The company, though, was trading for only $330M at the time of the deal with forecast revenue of $277M for 2012.
Millennial Media is now only worth $543M after being worth multi-billions. The company only reported $177M of revenue in 2012, but management and analysts forecast revenue jumping to nearly $280M in 2013. That 50%+ growth rate warrants a higher multiple than that of the Zipcar buyout. Rarely does a stock trade at only 2x current year revenue with over 50% growth. When looking at 2014 estimates of over $400M, the stock is incredibly cheap at less than 1.5x revenue. Normally, a stock such as Millennial Media would fetch over 5x current year revenue or a valuation of $2B.
Millennial Media has a lot to prove to the market in order to obtain the lofty valuations at the time of the IPO. The stock would have to gain 306% to match that all-time high. While not likely for years, the exploding growth of tablets and larger mobile phones will certainly help the mobile ad market grow.
As the Zipcar path shows, investors eventually become too negative and distracted by the hiccups of revolutionary services. It would be nothing for Yahoo to support a bid of nearly $1B for Millennial Media. While Millennial Media management would probably hold out for a better valuation with that growth rate, investors need to focus on the potential that the sellers of Zipcar missed around the lows.
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