Millennial Media (MM) is solidly positioned at the center of two hyper-growth technology sectors, mobile advertising and programmatic buying of digital media. According to eMarketer, mobile search and display advertising is up 220% in North America since 2012, with projections for growth in 2014 at 50%. In addition, Magna Global research states international programmatic buying is slated to triple from $12 billion in 2013 to $33 billion by 2017.
With explosive growth in both areas of expertise, you'd think Millennial Media would be firing on all cylinders, but that's not the case. Although the company issued preliminary Q4 2013 results above expectations on January 27th to much fanfare, the stock got crushed when management issued tepid Q1 2014 guidance during the February 19th conference call. To give you an example of how bad the carnage is, the stock initially shot up from roughly $6.70 to $8.40 after Q4 earnings and revenues were made public. After a weak 20% revenue growth was issued during the conference call for Q1 2014, the stock crashed to under $6. That's a decrease of approximately 30%.
Many investors would salivate over a company growing at 20%, but when you consider the revenue projections in the overall mobile advertising sector, it comes up short. Granted the advertising business tends to be seasonal, with Q4 the strongest, but formidable competitors like Google (GOOG) and Facebook (FB) aren't experiencing this problem. To put it in perspective, Millennial Media's year-over-year sales growth for 2013 was 44%. Q1 will be half of that. This includes sales of programmatic buying. Programmatic rival Rocket Fuel (FUEL) just executed an excellent quarter, and shares appreciated in value. Millennial Media continues to tank.
Despite this negative commentary, I'm still long the stock for a variety of reasons. Most notably a change in upper management with a different skill set than company founder Paul Palmieri. Palmieri stepped down from the CEO position last month to concentrate on companies in the venture capital stage. To replace Palmieri, Millennial Media appointed Michael Barrett CEO, and included him as a member of its board of directors. Mr. Barrett's claim to fame was orchestrating the sale of programmatic supply side platform AdMeld to Google while CEO of the company in 2011.
What I found most interesting in this brief part of a long and impressive resumé, is that Mr. Barrett has already taken a small company and sold it to a larger acquirer. Although he recently stated in The Baltimore Business Journal that he is focused on building Millennial Media, not the sale of the company, it's good to know he's previously seen opportunity, and taken advantage of the situation. There are many large technology organizations such as Yahoo (YHOO) and Microsoft (MSFT) that need a mobile presence, and Millennial Media could be a nice tuck-in. However, that's speculation on my part.
According to the conference call, CEO Barrett and CFO Michael Avon anticipate dynamic synergies with the recent merger with JumpTap, the programmatic side of the business. These synergies probably won't come to fruition until the second half of the year. Six months is a long time in the mobile technology sector, which could put additional pressure on the shares. Even the announcement of two new board members did nothing to help the sell off.
Results in investing are based on the price you pay for a security. I originally bought Millennial Media four months ago at $6.60/share, so I'm down a little over 10% on my original investment. I purchased the equity based on potential growth in two explosive markets, and the fact it was very cheap in valuation metrics. Those discounted valuation metrics still remain the same, and are even better because the share price has decreased, and overall revenues have significantly increased. Let's look at some numbers.
The balance sheet remains very strong with $99.2 million in cash and equivalents as stated in the conference call. The market cap is $0.62 billion with no debt according to Seeking Alpha. Seeking Alpha also provides us with Price/Sales of 2.41 and Price/Book of 3.90. Very reasonable valuations for a company growing in the range of 20%. The new CEO wouldn't pinpoint the actual growth, but somewhere in the 20% range. Could be 21%. Could be 29%. Perhaps he is under promising to over deliver.
As far as pure play mobile advertising securities go, Millennial Media was an industry darling when it IPO'd about two years ago at roughly $13. It shot up into the high $20's on irrational IPO exuberance. This is because of the strong brand advertisers they have in the portfolio - 90 of the Ad Age top 100 marketers. Things have changed in two years. You didn't have Facebook and Twitter (TWTR) to contend with, although Millennial still maintains an impressive client base.
Millennial Media is not a widow an orphan stock. It crosses the tape at $5.90, and could go significantly lower if macro market conditions don't improve. The S&P 500 is trading near an all time high, and the brutal Winter may put pressure on overall GDP for the first quarter of 2014. If it drops down to $5.60, it's only a thirty cent loss, but on a percentage basis, that's five percent. It begins to add up. This is definitely a risk/reward situation. A lot of risk is involved with Millennial Media, but the rewards could be substantial. The consensus price for the company is $9, a roughly 33% gain if it hits that mark in the next year.