Over the course of my investing career, by far my most successful trades have been busted IPOs. Readers of mine will remember my very bullish articles that ran contrary to extreme negative sentiment at the time in both Skullcandy (NASDAQ:SKUL) and Audience (NASDAQ:ADNC). These two relatively recent IPOs both fell to historic lows only to rebound sharply shortly thereafter. In both these cases, when I wrote about these companies, analysts were screaming sell and investors had given up all hope. I caught the bottom in both of these stocks and investors that had an open mind and listened to my contrarian view were richly rewarded. Both of these companies more than doubled off their lows in a short period of time. Today I present another similar story, a stock that nobody wants to touch with a 10-foot pole, Tremor Video (NYSE:TRMR). I am perhaps more bullish than ever before on this company due to an epic transformation under way in the online advertising world, one where Tremor Video is leading the shift with a powerful drive.
Tremor Video went public in a late June 2013 IPO where it raised over $118 million at $10 per share. After briefly trading at above $11 prior to Q3 earnings, Tremor dropped over 50% on November 8 after lowering revenue and earnings guidance. Just like YuMe (NYSE:YUME), my favorite ad tech play that I recently featured in an article, Tremor was simply caught with its pants down in its first year as a public company trying to predict the unpredictable and inconsistent nature of customer advertising spend. It was severely punished and has not recovered since. As a result, investors have a unique opportunity here to achieve extraordinary returns by taking advantage of this extreme negative sentiment and buying Tremor Video stock near historic lows.
As explained on the Q4 call, while Tremor Video is showing sharply higher demand for their performance-based pricing and programmatic model, margins are still under pressure from legacy demo pricing but there is evidence that this is indeed subsiding. Demo pricing is the traditional buying method in which TV media buyers only pay for ads that were delivered to a particular demographic. Like YuMe, Tremor Video's customers consist of the mega TV brand advertisers that are rapidly moving their footprint online and multi-screen and format. Tremor Video has been pushing advertisers to higher margin performance-based pricing models through the introduction of new mutually beneficial advertising formats and it is working. More specifically, 29.8% of Tremor Video's total revenue in 2013 was attributed to performance-based pricing, compared to only 22.7% in 2012. This is a fundamental shift that is still underway and not fully complete but it is clearly taking place. Adoption will naturally drive margin expansion and this will accelerate even further by the end of Q2 2014 when Tremor Video's VideoHub Connect platform will launch as a full-service programmatic offering. Meanwhile, despite the overly negative sentiment surrounding this company, analysts are estimating that revenues will grow by 25% in 2015. Hardly the bleak situation that you would expect from a company that has lost more than 50% of its market valuation since its recent IPO.
One of the main reasons why I love busted IPOs is because of the impeccable balance sheets, and Tremor Video is no exception. With over $92 million in cash on its most recent balance sheet, Tremor Video has an enormous margin of error available should anything go astray during the transformation. The company has no debt and total shareholder equity that at over $157 million sits just below the market valuation of just over $200 million, which makes this high flying ad tech company a true value proposition with little downside risk from these levels. Furthermore, Tremor Video had a positive net operating cash flow in 2013. There is no reason to believe that EBITDA will not turn positive as early as 2016, although 2015 remains an upside surprise possibility with at least one analyst estimating a breakeven year. All things considered, the company appears to be on the right track to achieving long-term profitability very soon, that is if they do not get acquired first.
CEO Bill Day was one of the founders of About.com, which was bought by Primedia during his leadership tenure at the company. His CFO at the time was Todd Sloan, whom he brought over to Tremor Video a couple years ago. This team did it before and they can do it again as Tremor Video sits in a very unique position among ad tech companies. The company holds key patents, including one recently granted for optimizing video advertising. The patent relates to Tremor Video's sophisticated and proprietary algorithm that works by optimizing an advertisers' video campaign in real time. It considers guaranteed brand-centric metrics such as cost-per-engagement and cost-per-100% viewable and 100% complete. These are all unique performance-based pricing metrics designed by Tremor Video that deliver not only high returns to the advertiser but drive high margin expansion for the company itself. This is the future of video advertising and it is only in its infancy at the moment. Tremor Video is an innovator in this space.
Furthermore, Tremor Video has exclusive advertising deals in place with significant publishers such as Meredith Digital. This deal was likely inked by President of Global Sales Lauren Wiener, who was a long-time Meredith executive. It also has unique 3 or 4 year deals with major publishers like Viacom, AMC, A+E Networks and over 200 other exclusive partners within its advertising ecosystem. These contracts offer tremendous value to a potential acquirer as they are both quantifiable and exclusive. On the Q4 call, CEO Bill Day mentioned that the publishers with whom they have exclusive deals with are satisfied with the partnerships and that existing contracts coming up for renewal will likely be renewed.
Finally, since the massive stock price drop insiders have been buying repeatedly. CEO Bill Day has purchased stock on the open market on four different occasions in the past several months totaling 33,000 shares. As well, CFO Todd Sloan and President Lauren Weiner have both made two open market purchases each. Three other directors have also made recent insider purchases. Most importantly, there has been zero selling of any shares by any entity since the IPO. This is quite unusual as at the very least the private equity and venture capital groups normally take advantage of the opportunity to cash at least some of their shares out, but so far none have sold even a single share. The people who know the most about the company's fortune and proprietary technology are not selling and are anticipating a higher price than even the $10 or higher they could have sold for in and around the IPO last June. I can't remember the last IPO where none of the insiders sold nearly a year after the event. That to me demonstrates extreme confidence in the company's future prospects.
In summary, investors have a very special opportunity to buy shares of a rapidly growing company in the midst of an epic transformation to a fully programmatic advertising solution at an over 50% discount to the IPO price. Downside risk is relatively low due to the nearly $2 per share in cash on hand, zero debt and the high shareholder equity that is close to the current market valuation. The negative sentiment surrounding Tremor Video is more due to investors not properly understanding the fundamental shift in video as evidenced by the rampant insider buying and the complete lack of selling since the IPO. I have increased my long position significantly over the past few days and it currently stands as my second largest holding behind YuMe. I plan to continue to accumulate shares throughout this quarter. It is not the easiest stock to buy as even small orders are difficult to fill, which indicates to me that there is a serious background demand for the shares despite the discounted price.
Disclosure: I am long TRMR, 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.