As Velti (VELT) hits recent lows below $6, investors are left pondering the reason for the sell-off. Especially considering every indicator points towards a robust market for mobile advertising, especially with the advance of the tablet.
Velti is the leading mobile advertising and marketing technology and solutions provider for brands, advertising agencies, mobile operators, and media companies. Its Velti mGage platform allows its customers to use mobile and traditional media, such as television, print, radio, and outdoor advertising to plan, execute, monitor, and measure mobile marketing and advertising campaigns that reach consumers through mobile internet applications.
Part of the reason for the concerns is that Velti is faced with a technology investor base that doesn't understand the receivable history in the advertising agency sector. The company hosted a financial conference call to discuss the large receivables, but that never helped the stock price.
It also hasn't helped to have tech industry leaders such as Google Inc. (GOOG) and Facebook (FB) continuously describe issues with monetizing mobile traffic. This has led some to advance the concept that television advertising dollars turn into desktop dimes and mobile pennies.
A major concern around the mobile ad market has been the increasing fear that smartphones weren't going to attract the revenue per search or display item as desktops. The fear being that the small screens were going to limit the ability to advertise.
Along came the tablets and it appears that marketers are quickly latching onto this device. It has the benefits of mobile combined with large enough screens for effective advertising. According to this Mashable article, tablet sales will grow to 121 million units in 2012 and nearly 416 million units by 2017. This huge growth will be a key driver for the mobile ad market.
Rising Mobile Budgets
According to an Online Media Daily report, marketers allocated 7% of their search budget in June to mobile, up from 5% in March. That is a significant increase in three months. In fact, the main reason for the growth in the U.S. was a 33% sequential growth of clicks on tablets that led to the 40% increase in tablet campaign budgets. More surprising was evidence that paid-search ads running on tablet devices showed favorable performance compared to desktop and laptop devices.
With all of the concern laid on the industry from the disappointing mobile ad results at Facebook, continued weakness in mobile search at Google helped lead the sector down. Both Velti and Millennial Media, Inc. (MM) trade at lows due to fears caused by these global leaders.
Some of the weakness in Velti has been blamed on fears of eurozone weakness from this company, with a majority of revenue from that area. For Q112, Europe contributed over 60% of revenue, though half of that came from the U.K. alone. In fact, the U.K. had over 125% growth YoY. Even the rest of Europe had over 25% growth, further disproving the reason for these fears.
Again, the facts continue to not back up the negative expectations in the market. According to the Online Media Daily report, the U.K remains strong thanks again to the fast adoption of the tablet; so the fears are clearly overdone.
It remains difficult to understand why Velti struggles to gain any market momentum. Revenue is expected to grow over 50% in 2012 and another 34% in 2013. At a market cap of $375M, the company now trades at less than 1x forward revenue estimates. Also, the company doesn't face legacy issues of replacing desktop dimes with mobile pennies such as Google and Facebook.
In reality, the mobile pricing scenario is closer to desktops than the general market thinks. The growth of the tablet should all but blur the lines between the two pricing structures. Eventually, tablets might even generate higher ad rates with the benefit of location-based advertising.
Millennial Media is another strong pick in the sector, having the second largest mobile ad network after Google. The valuation metrics just aren't as appealing as Velti, with that company not expected to be profitable for a while.
Disclosure: I am long VELT.
Additional disclosure: Please consult your financial advisor before making any investment decisions.