Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Rocket Fuel (FUEL) took a beating on Friday after the provider of artificial intelligence advertising solutions reported its third quarter results, the first quarterly report as a public company.

I am quite puzzled behind the disappointing share price reaction on Friday. I might initiate a long position depending upon the outcome of more research in the coming days.

Third Quarter Results

Rocket Fuel generated third quarter revenues of $62.5 million, up 132% on the year before. Revenues came in far ahead of consensus estimates of $53.6 million.

Revenues minus media costs came in at $36.0 million, up 149% on the year before. Gross profits rose 156% to $36.0 million, as gross margins rose by 5 percent point to 49% of total sales.

Net losses increased from $2.0 million last year to $6.9 million over the past quarter. Diluted losses per share came in at $0.61 per share.

Adjusted losses came in at $1.8 million, or $0.16 per share. This compares to consensus estimates at $0.13 per share.

CEO and Chairman George John commented on the third quarter performance, "We continued this fast-paced growth while managing EBITDA close to break-even. Compared to last year's third quarter, we more than doubled our customer base and more than tripled the percent of revenue coming from new advertising channels that include mobile, social and video, to 26% of our total revenue."

Outlook

Fourth quarter revenues are seen between $74 and $77 million, up 88.3% on the year before at the midpoint of the range. Adjusted EBITDA is seen between $1 and $2 million.

Analysts were looking for revenues of just $66.2 million.

Valuation

Rocket Fuel ended the third quarter with $125.3 million in cash and equivalents. The company operates without the assumption of debt, for a solid net cash position.

At this pace, annual revenues are seen between $229 and $232 million, as the company is scheduled to reported full year losses.

Factoring in losses of 20% on Friday, with shares trading hands at $38 per share, the market values Rocket Fuel at $1.25 billion. This values operating assets of the firm at $1.1 billion, or 4.8 times annual revenues.

Given the lack of earnings, Rocket Fuel does not pay a dividend at the moment.

Some Historical Perspective

Rocket Fuel has only gone public in September, when shares ended their opening day at $56 per share, after shares have been offered to the public at $29 per share.

Shares have steadily risen to highs around $68 halfway through October, to lose nearly half their value over the past month.

Investment Thesis

I took a look at Rocket Fuel's prospects just after the company went public at the end of September.

At the time, I argued that annual revenues of $200 million should be attainable, as revenues are now seen around $230 million for this year. Growth has been very solid, with year-on-year revenue growth of 132% over the past quarter, which compares to growth rates of 137% in the second quarter.

Perhaps the drop in the stock is driven by the fourth quarter guidance, which implies year-on-year revenue growth of 88%, quite a slowdown compared to the reported rates over the past quarter. Still, the guidance came in comfortably ahead of consensus estimates.

As such, Rocket Fuel's Artificial Intelligence system continues to move along nicely. The firm now employs 552 workers, which serve 938 customers.

Losses are very manageable while revenue growth is still very impressive, despite the slowdown to still very much acceptable growth rates for the fourth quarter. Even when applying lower 50% growth rates for 2014 and 2015, revenues of at least $500 million are still attainable in 2015, which values the company at roughly 2 times operating assets.

As such I am completely puzzled behind the big drop in the share price on Friday, as both results and the outlook seems solid. Depending upon the outcome of further research, I might initiate long position in the firm.

Source: Rocket Fuel - Why Is The Market So Disappointed?