The Rubicon Project: Reasonably Successful IPO In Hot Programmatic Advertising Market

| About: The Rubicon (RUBI)


Data analysis and cloud targeted to optimize digital advertising.

Market is set to explode in the coming years.

Unclear how Rubicon fits in the fast-changing industry landscape.

The Rubicon Project (NYSE:RUBI) went public at the beginning of April. Shares of the technology company, which automates the buying and selling of digital advertising through a cloud-based platform, saw a good start to trading after a weaker pricing process.

The company operates in a very attractive market that is showing rapid growth, which of course results in competitors entering the same lucrative market. As I am not impressed with the relative growth rates and am unsure about the changes in the digital advertising landscape in the coming years, I remain on the sidelines.

The Public Offering

The Rubicon Project essentially runs an advertising matching engine in the cloud, which combined with speed and big data analytics, aims to bring digital advertising buyers and sellers together.

The company sold 6.8 million shares for $15 apiece, thereby raising nearly $102 million in gross proceeds. The company sold 5.4 million shares and actually raised $81 million in proceeds from the offering, while selling shareholders offered the remainder of the shares.

The offer price was actually disappointing, as bankers and the firm sought an offer price of $15-$17 per share. As a result of soft demand, which was undoubtedly triggered by the recent correction in momentum stocks, the syndicate was triggered to price the offering at $15 per share.

Some 19% of the total shares outstanding were offered in the public offering. At Wednesday's closing price of $20.69 per share, the firm is valued at $717 million.

The major banks that brought the company public were Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), RBC Capital Markets, Needham & Company, Oppenheimer and Luma Securities.


The Rubicon Project runs an advertising automation cloud platform which is capable of analyzing billions of data points in real time. As such, it is able to make many transaction decisions and bid requests in real time. Its solutions allow for higher volumes and effectiveness of advertising, thereby boosting returns on purchase budgets by advertisers. The Rubicon Project has relationships with more than 500 sellers of advertising, including 40% of the top 100 comScore list.

According to a report from PwC, the market for display, mobile and video digital advertising is expected to grow to $90 billion by 2017. Real-time bidding, which Rubicon is focusing on, is expected to grow from a $1.4 billion market in 2011 to nearly $21 billion by 2017.

For 2012, Rubicon reported a 54.0% increase in annual revenues to $57.1 million. The company managed to narrow its losses significantly from $19.7 million in 2011 to $6.6 million in 2012.

Growth continued for the first nine months of 2013 as revenues increased by 48.0% to $55.7 million, thereby approaching the annual revenues for 2012. Losses were on the rise, however, increasing to $12.4 million.

Rubicon Project operates with roughly $21 million in cash and equivalents and has merely $4 million in debt and capital lease obligations outstanding. Factoring in the $81 million in gross proceeds from the IPO, the company operates with a net cash position of roughly $90 million.

Given the nearly $720 million valuation, net operating assets are valued at around $630 million. This values The Rubicon Project at roughly 7.4 times annual revenues given that annual revenues could come in around $85 million in 2013.

Investment Thesis

As noted above, The Rubicon Project offering has been difficult, which has been caused by the volatile market conditions in technology and cloud names. Therefore, the company priced the offering some 6.2% below the midpoint of the preliminary offering range.

Fortunately for shareholders the stock recovered quickly, showing a very healthy 33.9% gain on its opening day. In the weeks following, shares have hovered around the $20 price level, resulting in nice gains for early investors.

While the market for programmatic solutions is set to explode in the coming years, Rubicon is not alone. Some other big names in the market include Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Rocket Fuel (NASDAQ:FUEL). In comparison to the estimated growth of the market segment and revenue growth rates reported by some competitors, the slowdown of third quarter revenue growth to 44.8% is a bit disappointing.

The market is very new, and rapid growth will undoubtedly go hand in hand with rapid changes in the competitive and market landscape, some of which an outsider like myself finds very hard to judge or predict.

As such, I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.