As I was perusing the online edition of the New York Times (NYT) yesterday afternoon, an interesting article caught my eye. What we know already has just been confirmed again by some hard numbers. Desktop advertising is slowly going the way of the dodo bird. On the other hand, mobile advertising is set to increase at a breakneck 83% clip during 2014. Clearly, there is a fundamental shift at work here, and the hamster spinning around in my head started thinking how to best capitalize from this once in a lifetime event.
I see this paradigm shift happening at work, where my e-commerce clients are using terms like "mobile responsive" when talking about their new web strategies. None of them really understand what that means exactly, but they just know that mobile is hot and desktop is not and they want to play in this space. Even my 2 year old daughter won't touch the iMac that I recently gave her. The archaic mouse confuses her, she does not know what to make of it, but she flips through screens on her iPad like a pro, with a special fondness for the YouTube app and Nicki Minaj music videos. Who would have thought that the biggest deal of the year so far would be Facebook (NASDAQ:FB) buying a mobile app for $19 billion?
So we know mobile is red hot and desktop is ice cold; that is indisputable. Question is, how do we make the most money possible from this opportunity?
The best pure play that I have found in the space is Millennial Media (NYSE:MM), and the best part about it is that thanks to negative sentiment surrounding its 2014 guidance, it is on sale now at a huge discount. Following the recent Q4 earnings, which blew away estimates by $0.13 and came in at a surprising $0.08 profit, traders quickly sold off the shares based on expectations of slower than expected revenue growth through 2014. This 20% sales growth guidance for 2014 disappointed those looking for instant gratification. This is a company in transition afterall, coming off a massive acquisition of performance based advertising company Jumptap late in 2013. It is still in the process of properly integrating and best leveraging these new assets. When pressed by analysts on the Q4 call about the 20% sales growth rate for 2014, CEO Michael Barrett says:
As far as the annual guidance, again, it is my choice as the new kid on the block that the direction we're going in this year is taking an overall look at both the market opportunities with some of the capabilities we have, capabilities that we're building upon. And we think that it's fair to say that this is a company we expect 20% growth this year. I think that that's all we can say about it at this juncture.
A couple weeks later following this call, at the Morgan Stanley Technology Conference, CFO Michael Avon stated that the 20% is more of a baseline for 2014 growth. My take from his remarks was that this is a level that they are likely to exceed and certainly not fall below. For this reason, analysts and traders are expecting the worst, which is a situation where I always seem to make a lot of money by taking the other (unpopular) side. A new CEO, a new CFO and a rapidly growing industry. I will take my chances betting that results will exceed these 2014 sandbagged revenue projections. With the stock trading at where it is right now, you would think that they were calling for a 20% drop in sales, rather than a gain of 20% during a transition year. While 20% represents a slower than expected growth rate for this mobile high flier, I see this as simply an extraordinary event, not a reason of great concern to warrant such a bludgeoning of the stock. Furthermore, due to the impeccable balance sheet with lots of cash and no debt and projections of long-term profitability beginning in 2015, I don't see very much risk here to the downside from where it is trading at right now.
So other than being found in the discount bin, what makes Millennial Media investable?
Besides 2014 sales estimates of over $410 million and a customer list that includes 90 of the top 100 Ad Age advertisers, Millennial Media owns enormous proprietary assets. Firstly, according to CEO Michael Barrett, they have 625 million user profiles that consist of behavioral, usage and location data points and patterns, which they offer to advertisers through direct sales. This data may even be more accurate than what companies like Facebook acquire on users as it comes from multiple third party sources and allows Millennial Media to deliver a laser targeted ad experience to mobile like nobody else. Similar to YuMe (NYSE:YUME), my favorite ad tech buy that I recently profiled, Millennial Media is moving aggressively in to programmatic, and is one of the first to market with its self-serve mMedia solution and its highly regarded MMX platform partnership with AppNexus. It has been speculated that Millennial Media could offer its vast user profile database to mobile buyers, opening up a significant potential high-margin revenue stream.
Analyst Andrew McNellis from Evercore Partners had this to say about Millennial Media's head first dive into programmatic advertising solutions:
We see Millennial's entrance into programmatic buying and selling through Jumptap and MMX as the largest near-term growth driver, but we also see more integrated, or native, ad formats as another growth opportunity. For example, MoPub introduced native in-feed ads on their network in December, and we see no reason why Millennial should not do the same given that Facebook and Twitter continue to drive advertiser interest in these formats.
Additionally, CEO Michael Barrett developed and sold an Ad Tech company called AdMeld to Google (NASDAQ:GOOG) for $400 million. There is constant speculation that he might do it again with Millennial Media. AOL (NYSE:AOL) could be a potential suitor given that its Advertising.com division has its headquarters in Baltimore, which is where Millennial Media is and they are underexposed in mobile. To me, that seems like a perfect fit. Yahoo (NASDAQ:YHOO) would also make my list as a potential acquirer because CEO Marissa Mayer is on an acquisition streak, particularly with companies that have strong revenue and mobile exposure. Millennial Media also has deep roots within Yahoo. CEO Michael Barrett was the CRO at Yahoo, EVP Mollie Spilman was the CMO at Yahoo, and Director Ross Levinsohn was the former interim CEO at Yahoo.
Richard Fetyko, an analyst with ABR Investment Strategy notes:
As Millennial Media transitions to programmatic, its strategic value will rise and with it, the chance of a take-out rises as well.
To summarize, Millennial Media is a high-growth company that is a leader on the forefront of one of the most significant paradigm shifts in the advertising business and technology in general in the past century. Following Q4 earnings, the stock got hammered because of a 2014 growth rate of "only" 20%. It is in a transition year, integrating its Jumptap acquisition and analysts are expecting long-term profitability in 2015. Millennial Media has plenty of cash and zero debt, and is one of the major innovators of programmatic advertising and is a pure play in red hot mobile. Although Millennial Media had an IPO price of $13 on March 29, 2012, it actually more than doubled on that very day in a buying frenzy to over $26. So investors have the opportunity to buy now at a significant discount to what others have paid. I am betting that the sentiment is far too negative, and with all the potential catalysts I outlined, that it will inevitably shift. When it does, Millennial Media will move higher faster than it dropped. By then it will be too late to get on board. Buy grief, sell hype; that is my mantra. This one is ripe for the picking.
Disclosure: I am long MM, YUME. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.