Rocket Fuel IPO Blasts Off... How To Play The Ad-Tech Boom

| About: Rocket Fuel (FUEL)

Friday's IPO by Rocket Fuel (FUEL), which saw the shares spike from its $29 offering price to a high of $62.50 and a strong, $56.10 close, may mark a shift in enthusiasm around advertising-technology companies. This could signal opportunity for investors.

Rocket Fuel is a technology company that has developed an artificial-intelligence (NYSE:AI) based automated, decision-making platform for online advertising. The company's "programmatic" platform enables customers to buy online media in "real time" through digital advertising exchanges. It also allows real time targeting to get the right ad in front of the right person in real time. Based on Friday's close, the Redwood City, California-based company has a market capitalization approaching $2 Billion. For the years ended December 31, 2010, 2011 and 2012, its revenues were $16.5 million, $44.7 million and $106.6 million, respectively, and for the six months ended June 30, 2012 and 2013, its revenues were $39.6 million and $92.6 million, respectively.

Executives on Rocket Fuel's IPO road show successfully told the story about the effectiveness and scalability of their programmatic, real-time bidding (RTB) platform. Programmatic refers to buying and selling done on a real-time basis using data-driven rules and algorithms to automate the process of identifying and targeting relevant audiences. Platforms such as Rocket Fuel's allow for advertising inventory to be bought and sold on an impression-by-impression basis. According to market research firm IDC, RTB is expanding faster than any other segment of the digital advertising industry, with total RTB sales increasing from approximately $3 billion in 2012 to approximately $14 billion in 2016.

According to market research firm eMarketer, the worldwide digital advertising market will exceed $118 Billion dollars this year, and is expected to surpass $163 Billion by 2016.

Other companies in the space include Tremor Video (NYSE:TRMR), which went public in late June @ $10, stumbled nearly 40% shortly after its IPO, but has been on a tear since mid-August and traded north of $11 this past week before closing the week @ $9.80. YuMe (NYSE:YUME), which is also based in Redwood City, CA, and went public in August @ $9/share, closed Friday @ $10.88, is also a video-centric ad-tech play. Tremor, which is headquartered in New York, has market cap is in the $500MM range and YuMe's is roughly $350MM. Mobile ad network Millennial Media (NYSE:MM), which went public in March 2012 at $13, doubled out of the gate and has dropped to under $8 today, which still represents a market cap north of $600MM.

Consolidation in the industry has begun. In the mobile space, Millennial recently agreed to acquire JumpTap for over $200MM and Twitter announced a $350MM acquisition of Mopub. In the online video segment, AOL, Inc. (NYSE:AOL) is acquiring for $405MM.

Two speculative stocks which may be takeover targets in this market include Mimvi, Inc. (MIMV.OB), with only a $10MM valuation, and Hipcricket (HIPP), at about $70MM. Mimvi, which acquired multi-channel, Supply-Side Platform (SSP), Adaptive Media in July, announced last week that it will change its corporate name. The Irvine, CA-based company partners with mobile app developers, video content providers and website owners who have a supply of ad inventory and puts this inventory into its platform to be matched with advertisers. Hipcricket (HIPP.OB) was recently profiled in this Seeking Alpha article, Hipcricket: A Hidden Gem In The World Of Mobile Advertising, after its partnership announcements with Google (NASDAQ:GOOG) and Mondelez (NASDAQ:MDLZ).

Some other growing companies in the space include PubMatic, Rubicon Project, and OpenX, but all three of these are privately-held. And NetShelter was acquired in May by Ziff Davis, which is a subsidiary of j2 Global (NASDAQ:JCOM).

As witnessed by the Rocket Fuel IPO lift off on Friday, the ad-tech space is red hot. Some of the relatively new IPOs in the industry have certainly benefited from the renewed interest and will be interesting to watch as acquirers of smaller players or potential takeover candidates, themselves.

Disclosure: I am long HIPP.OB, MM. 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.