Once Bitten, Twice Shy - Impressions Of The Mobile Advertising Market

 |  Includes: AAPL, FB, GOOG, MM, VELTF
by: Ted Stamas

Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

In March, eMarketer published the enclosed chart for its projections on the mobile advertising market:

At the time I was overweight in my portfolio with Velti (VELT). At that juncture it was the leading independent global mobile advertising exchange. I believed owning shares of Velti was like walking into Fort Knox with a government issued withdrawal slip - like a winning ticket for supermarket sweepstakes. With the growth that eMarketer extrapolated, all I would have to do was wait a few quarters, and I could make a nice percentage on my original investment. This one was going to give me a run for the money.

I sold my entire position in Velti at $2.35/share only a few days after the publication of these statistics for a whopping loss. It was another bad quarter in a year of bad quarters for the company. I cringe when I look at the decrease in my portfolio. Velti now trades for thirty-five cents a share. In fact, it's currently being scrutinized by two law firms for a possible class action suit for securities fraud. It's like Global Crossing or WorldCom all over again.

That said, I don't want to fall asleep on the mobile advertising industry. The chart eMarketer offered says it all - $27 billion in ad sales by 2017 by their calculations. It's a huge growth story in the overall advertising spectrum. Velti may have come up short, but there are plenty of other companies that compete in the space.

The fate of a company like Velti may have put the kibosh on other small, independent mobile advertising networks in the eyes of the AdAge 100. Conglomerates don't want some fly-by-night operator handling their marketing on handheld devices. Far from it. The only publicly traded independent on the major exchanges that excels in mobile marketing is Millennial Media (NYSE:MM). It can boast of 85% of the AdAge 100 as clients, although it has less than 1% market share.

The chart below was released by eMarketer last week, and is an eye opener if you are investing in the sector:

Google's (NASDAQ:GOOG) growth from 2012-2013 remains relatively flat, although it does a lion's share of the business with AdMob. Apple's (NASDAQ:AAPL) iAd isn't included in the chart, but it commanded about a 2.3% market share in 2012. Millennial Media has less than 1% of the pie, and its growth is in decline as a function of overall industry share. Facebook (NASDAQ:FB) tripled its business this past year, and is the dark horse at #2.


The big knock on Facebook is that it is overvalued. Perhaps that's true, but you could say the same for Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA), and Netflix (NASDAQ:NFLX), and those stocks keep pushing through the stratosphere. My original post on Facebook was back in late August of 2012, and I specifically stated I was buying the stock at $19. People thought I was crazy because the security was "overvalued".

This company is a full fledged dreadnought. I believe it will see $100/share in the next twelve months, if not by Christmas, if it can produce another stellar quarter. Right now it sits at #15 in the Investor's Business Daily top 50 stocks. This is where the hot money goes, all the momentum players. Facebook currently trades at $44/share, and the high estimate on Wall Street is $55 by SunTrust. When Facebook eclipses analyst predictions, the sell side players will up their estimates, which will push the stock even higher. It's a vicious cycle, but it happens quite frequently.

There are a lot of catalysts to propel the equity higher. Most importantly is the possibility of inclusion in the S&P 500 during the next year. If this comes to fruition, many mutual funds would be forced to buy the company. Next would be window dressing at the beginning of next quarter by fund mangers if the stock keeps churning and burning. Lastly, the monetization of Instagram would add incremental dollars to an already fat bottom line.

Although this is a big company in regards to market capitalization, there is still plenty of room to grow. It currently is a $100 billion organization, #33 in the United States, but that pales in comparison to competitors like Google and Apple.


Where technology is concerned, you can't go wrong with Google. It was a category killer from the get go when it made Boolean searches on search engines like Alta Vista and Northern Lights obsolete. It continues to trounce Apple in global market share with the Android operating system in the smartphone wars. If eMarketer is correct, the company commands an enviable lead in mobile advertising. However, it is a mature company with a large market cap.

As of September 2nd, Google has the #3 market capitalization for all U.S. equities at $282 billion. In addition, it doesn't pay a dividend. Consensus analyst estimates for earnings growth as reported on Yahoo Finance is 9.4% for this year, but levitates to 17.5% for 2014. Let's just say it is going to be growing at 15% per year (that's the five year consensus), for demonstration purposes. At its current price of $880, that would give you a share price in about a year's time of roughly $1,050 give or take a few dollars. A nice gain if it meets those projections.

My experience has been that most companies get about a ten year window to produce significant growth. Google certainly fits that bill. It may also buck conventional wisdom by continuing to expand for the next five years. We are in the wireless broadband revolution, and it is a kingpin. However, the law of large numbers may catch up to it, much the same way that Apple experienced last year. Even with Google's highly regarded AdMob service, I'd be more inclined to invest with it if it paid a sizable dividend.


I'm not like Rain Man or Mr. Know It All when it comes to the granular technological aspects of Apple's iAd service, but it would appear to me that its mobile advertising division is top shelf if it's anything like Apple's handheld product lineup. Like Google, Apple needs little introduction, but it does pay a dividend, 2.5% which is very good for a technology stock. In the United States, the company is numero uno in market capitalization. $442 billion dollars was the tally on September 2nd. $50 billion more than Exxon Mobil (NYSE:XOM) which comes in at #2.

From my perspective, the large market cap is the big problem growth investors may have with investing in a company like Apple in regards to its advertising network. The equity trades for $500/share, and has had a terrific run since the introduction of the iPod. However, when we break down the consensus numbers as reported on Yahoo Finance, we get earnings growth of only 8.3% for 2014, although the five year projection is for 20% expansion annually on average. Like Google, you have an opportunity to make money with this stock, but Apple pays the dividend.

Millennial Media

Millennial Media is fairly new to the public domain, and hasn't fared too well since its IPO a little over a year ago. Millennial's 52 week range is $16/share at the high point, and $6 at the low, right about where it trades today. In 2011, it commanded 1% of the overall mobile advertising market, but that has descended each of the past two years to 0.82% last year, and 0.72% currently. Although it's growing because the overall sector is growing, it's still losing market share which may have contributed to the price decline.

The company sports reasonable valuations: Price/Sales 2.3, Price/Book 3.29, Cash/Share $1.51. However, I believe this stock can go lower, and wouldn't pay anything above $3-$4 for it. As impressed as I was with the Barclays Internet Connect Conference presentation in March, circumstances have changed for the company. Most specifically, Millennial's recent acquisition of Jumptap. CEO Paul Palmieri sheds some light on the recent acquisition in the most recent conference call:

Jumptap is the second-largest independent mobile advertising platform in the U.S. behind Millennial Media. According to IDC, Jumptap represented 10.7% of the U.S. mobile advertising network industry last year, compared to Millennial Media's 18%. Together, Millennial and Jumptap combined, would have accounted for 28.7% of the industry last year, about on par with Google's share, according to IDC.

This combination of companies makes for a formidable competitor, at least stateside. About 80% of Millennial's revenues this past year were domestic. There are plenty of opportunities internationally. However, Millennial Media and Jumptap still have to assimilate the two organizations which will take some time. Millennial also missed on revenue projections last quarter. It wasn't much, 47% realized as opposed to 50% projected, but it was a miss nonetheless.


Although Velti left me on the hook, I still believe there is plenty of money to be made in the mobile advertising space. All four companies I've discussed do have significant growth, some better than others. The Wall Street Journal reported this weekend that Apple will be doing business with China Mobile (NYSE:CHL), so that may move the stock in the short run despite the possibilities of margin pressure. Google is another good one if you like mega-cap companies.

That said, with a sector that is in hyper-growth, I prefer to go with the momentum players. My preference is Facebook. Unless Sheryl Sandberg resigns, the stock may keep on running despite the always present obstacle of insider selling, most specifically by founder Mark Zuckerberg. I've had Millennial Media on my watch list for six months now, and it does nothing but go lower, despite the 47% revenue growth. I'm going to continue to monitor it, but after my experience with Velti, it's going to have to show me it can execute better numbers.

Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.