Over the past year, Rocket Fuel (FUEL) stock has suffered dramatically, dropping 80% from its peak. Rocket Fuel, a leading digital advertising software company, has experienced rapid, unsustainable growth. The company's costs are accelerating faster than its revenues, and employee sentiment seems to indicate a lack of internal organization. In addition, many brands have been deferring services like those offered by Rocket Fuel to do them in-house. Despite these worrisome issues, Rocket Fuel management has done an excellent job in taking concrete actions to both fix problems and take advantage of opportunities. Investors are dramatically overreacting to FUEL's short-term worries and are overlooking incredible opportunities for the future. Rocket Fuel is poised to overcome its struggles and continue growing aggressively, potentially rewarding investors generously.
Company Overview
Rocket Fuel is very stable financially and maintains a prominent and growing position in its industry. Rocket Fuel is a digital marketing company that provides programmatic advertising services, utilizing predictive technologies that involve big data, artificial intelligence and machine learning to optimize its clients' campaigns. The company garnered $408 million in revenue in the past year, and was ranked 15th on Deloitte's 2014 ranking of the 500 fastest growing technology companies. FUEL has $87 million in debt and $107 million in cash. Sixty two Fortune 100 companies employ FUEL's services for their campaigns. Rocket Fuel has a dominant edge over its competitors due to its superior technology. According to a company presentation, FUEL utilizes over 50,000 CPU cores stationed in 12 global data centers that oversee approximately five billion devices, handling an enormous amount of data. A Forrester Total Economic Impact study estimated that 90-day campaigns utilizing Rocket Fuel services received a 122% return on investment, proving the effectiveness of their services. The medium alternative, according to the study, only provided 76% ROI. Rocket Fuel is clearly a well run company with a strong position in its industry, yet as I will now explain, it is experiencing multiple difficulties that have investors very worried.
Threats
Rocket Fuel's greatest strength is also its greatest weakness: growth. According to financial statements, the company has grown revenues 124% annually for the past four years. However, this barely exceeds the growth of its expenses, which have appreciated 121% annually over the same time period. This problem has become especially dramatic recently. For fiscal year 2014, revenue growth of 69% greatly lagged behind expenses growth of 83%. Unsustainable growth is also illustrated by employee sentiment. Rocket Fuel has a mediocre score of 3.2 out of 5 on Glassdoor, and many of the reviews are very troubling. Multiple negative reviews blame rapid, unsustainable growth for unorganized and uncoordinated communication within the company. One review claims that,
As the company is growing at a very rapid pace, interaction with senior management is less.
Another asserts the point,
Lack of coordination between teams due to very rapid pace of growth.
Despite the apparent trouble occurring at the company, it is very promising to know that its greatest issue is unsustainable growth. Once growth stabilizes and the company gets its expenses under control, Rocket Fuel will become extremely dominant and will appreciate greatly in market value. The company is taking advantage of multiple opportunities to heal its wounds and put in on the path to profitability.
Catalysts and Opportunities
Despite abundant negativity towards FUEL, investors are overlooking multiple catalysts that can propel the company to new heights. Firstly, the company's costs will gradually decelerate in the coming years. In the past year, the company completed the majority of its facility build-outs in 2014 and doubled its employee headcount in the past year. Without these non-recurring costs in coming years, the company may be poised to increase its profit margins and possibly reach profitability. To support this, in the past year, FUEL spent $55 million on capital expenditures, yet CFO Dave Sankaran estimated in the recent earnings call that CaPex will only be $20 million in 2015. In addition, big data and artificial intelligence are very new technologies, and will gradually become cheaper due to economies of scale. Rocket Fuel has a serious opportunity to refine its business model and become a very profitable organization.
It is very promising that multiple new executives have joined the company with great deals of experience, addressing troubles within the corporation and capitalizing on opportunities. CEO George John stated in FUEL's Q4 2014 earnings conference call that,
One of my principal focus areas for Q4, 2014, was bringing in the right senior talent to help us operate Rocket Fuel smoothly upscale.
The CEO seems to recognize that management needs to get a handle on the corporation's growth, and seems to have brought in competent people to do so. Very recently, former Salesforce executive Randy Wootton was hired as Chief Revenue Officer. David Sankaran, who holds over 25 years of experience as an executive at multibillion dollar technology companies, was hired as CFO. The addition of two veteran executives to handle the company's finances should give investors confidence that Rocket Fuel will be better able to manage expenses. In addition, the company hired Jennifer Trzepacz, a former VP of HR at Salesforce, as SVO of human resources. This seems to indicate that management has acknowledged worrisome employee sentiment and is set on dealing with it constructively.
Furthermore, Rocket Fuel is putting more focus on areas of greater revenue growth in order to sustain its rapid expansion. Unlike competitors Hubspot and Tapad, Rocket Fuel maintains a presence in eighteen countries. In the past year, revenues outside of the United States have grown 120%. The company hired Manu Thapar as a new SVP of research of development, who, the CEO claims, has a background "aligning geographically diverse R&D teams to create business outcomes." This is a very promising indication that the company is taking international expansion very seriously. This could lead it to become a dominant international force, taking its innovative services throughout the globe. In addition to expanding internationally, the company is taking advantage of strong trends within digital marketing. In the past year, revenues from mobile, social and video channels grew an astounding 201%. These sources now occupy 44% of revenues, as opposed to 26% only a year ago. By shifting into areas of rapid growth, Rocket Fuel is zooming towards great revenue expansion and profitability, posing its stock for great appreciation.
Another pertinent issue affecting Rocket Fuel is a shift by marketers to bring programmatic advertising in-house, thus losing dependence on agencies such as Rocket Fuel. According to the World Federation of Advertisers, the use of agency trading desks has declined by 15% over the past year, whereas the use of independent trading desks has tripled year-over-year. This issue is especially pertinent to Rocket Fuel, who until recently provided technology that did not completely assure transparency and collaboration with marketers. Brands prefer to do their own analytics and have as much oversight over their campaigns as possible, and many advertising agencies fail to provide this. Rather than succumbing to this trend, Rocket Fuel is optimizing its business by taking advantage of it. In the recent earnings conference call, the CEO discussed the creation of an agency relations team in order to enhance the relationships between Rocket Fuel and its clients. This also complements the company's acquisition of [x+1], which attains an integrated demand-side platform that allows brands to manage complex digital campaigns. [x+1]'s data management platform uses predictive decisioning to analyze data and optimize campaigns across multiple channels. [x+1]'s technology provides brands with the autonomy to oversee their marketing and data management as well as a premier platform to reach their target audiences and grow their influence. [x+1] will provide Rocket Fuel with future opportunities as well as present value. According to Crunchbase, seven of the top financial services advertisers use [x+1] for programmatic marketing. The acquisition of [x+1], the creation of the agency relations team and the hiring of new executives prove that Rocket Fuel is competently addressing problems and is taking advantage of opportunities in its growing industry.
Conclusion and Valuation Analysis
The 80% drop in FUEL stock over the past year is completely unjustified, and investors have an excellent opportunity to look into this company, as the potential for gains is quite lofty. Rocket Fuel is a leader of a rapidly growing industry, with premier technology that is used by many of the world's largest brands. Despite various concerns regarding unsustainable growth, employee sentiment and a shift to in-house advertising, the company has been apt to not only respond to threats but to turn them into opportunities. Rocket Fuel hired competent managers to deal with extravagant costs and provide organization, developed an agency relations team and acquired [x+1]. The company has also grown revenues very quickly in the areas of mobile and video, and it is focusing on international expansion. Rocket Fuel is clearly poised for dominant growth, yet its valuation in no way reflects this. The stock has a price/sales ratio of 1.01, according to Finviz. In comparison, the S&P 500 (SPY) has a p/s of 1.88, and the S&P BMI Information Technology index has a p/s of 2.97. Does it not seem somewhat ridiculous that a company with close to triple digit sales growth is valued lower relative to sales than the overall market, where revenue growth is less than five percent? The reason that FUEL stock is so depressed is because of overblown investor concerns. Once Wall Street recognizes the astronomical growth that is ahead for Rocket Fuel, the stock will appreciate greatly.
