After reporting earnings on Tuesday morning, Velti (VELT) jumped nearly 12% after beating analyst revenue estimates. Combined with a big gain on Monday, the stock had a nearly 20% two day gain. Amazingly though, it still trades at extremely low valuations.
The company engages in the provision of mobile marketing and advertising technology and solutions for brands, advertising agencies, mobile operators, and media companies around the world.
Possibly the most important news was that the company had positive cash flow and reduced DSOs. Yes, the cash news even outshines the reported 71% revenue growth. Falling cash balances were the reason the stock plunged from around $9 to under $6 following the Q1 2012 earnings report.
As mentioned with the article on C&J Energy Services (NYSE:CJES) this week and the article on SodaStream (NASDAQ:SODA) last week, the market appears fixated on certain stocks while allowing these to slide. The mobile advertising market has taken off yet the stock of Velti makes one think the company is in a dying industry.
Q2 2012 Highlights
The company reported the following highlights for Q2 2012:
- Announces second quarter revenue of $58.7 million, growth of 71 percent, compared with Q2 2011
- Announces second quarter adjusted EBITDA of $6.2 million, growth of 100 percent, compared with Q2 2011
- Generates $25.0 million in operating cash flow. Generated $7.0 million in free cash flow excluding acquisition and debt payments, $4.4 million inclusive of acquisition and debt payments
- Increases annual revenue and adjusted EBITDA guidance, reiterates expectation for neutral operating cash flow in the third quarter and sustainable positive free cash flow by Q4 2012
Analysts expected a loss of $0.01, so earnings were in line with expectations. Worth noting is that as a marketing agency, the company gets the majority of its earnings in Q4. As the company keeps reporting strong numbers, the 8x earnings multiple provided by the market won't last. The stock has some of the best growth potential in the market yet has one of the cheapest valuations.
The company guided to the following numbers for Q3 and fiscal year 2012:
- Company expects Q3 revenue between $60M and $64M
- Company expects Q3 adjusted EBITDA of $8.5M to $10.5M
- Company expects 2012 revenue between $285M to $296M
- Company expects 2012 adjusted EBITDA of $82M to $88M
With a market cap around $500M, Velti trades at less than 6x the EBITDA numbers.
As mentioned in this past article, a major growth driver is the movement of consumers to mobile traffic and further to tablets that provide for better mobile advertising options.
Another major driver is the Americas where revenue grew at 126% year-over-year. At only $16.7M in revenues, the Americas have numerous years of fast growth ahead.
The CASEE acquisition in China will provide a mobile advertising exchange for long-term growth in that country. Also, it provides the ability to expand the mobile marketing offering though it is expected to be material for the next year.
Velti was clear during the conference call that the company faces a very fragmented market with different competitors in most countries providing this company with a compelling advantage of being able to offer a complete suite to customers.
As far as stocks go, Millennial Media (NYSE:MM) provides the only real pure play comparison. The company provides the largest independent mobile advertising exchange placing second only behind Google (NASDAQ:GOOG). Millennial has about 60% of the revenue base, none of the profits, but double the market cap of Velti. Just another example of the relative value opportunities provided by the market.
The market valuation of this stock remains extremely difficult to understand. The company appears to out-execute the whole industry, yet it is rewarded with market low multiples. In fact, analysts forecast a five-year growth rate of 34%, yet the stock trades at 8x forward earnings. The PEG using this years earnings is a shocking low 0.32. Remember anything below 1.0 is considered a bargain.
A major impact to the mobile advertising sector has been the issues where both Facebook (NASDAQ:FB) and Google have encountered problems with the transition of traffic from desktop to mobile. In both cases, those companies have had issues with monetizing the transition of traffic.
Investors need to understand that mobile only focused advertising companies such as Velti and Millennial don't have the legacy conversion issue. Every dollar on mobile is additional revenue for these two firms. Load up on these stocks based on the misplaced knowledge off the sector. Velti is clearly the cheaper of the two at this point.