With the much-published failures of Facebook (FB) and Google (GOOG) to monetize mobile traffic that switched from desktop, the sector has obtained a ton of bad press, mostly from uninformed journalists and investors not understanding the difference between legacy companies and new entrants focused on mobile.
While other people focus on the rather large missteps, Stone Fox Capital has been focused on the companies benefiting from the monumental shift to mobile provided by fast wireless data networks and a movement to more advanced smartphones and now, more importantly, tablets.
A whole slew of companies are benefiting from this shift as happens with every technological move. Legacy companies either aren't savvy enough to make the shift or the economic structure prohibits a move as revenue is cannibalized by the currently lower monetization rates.
Mobile Monetization Defined
The concept encapsulates the ability of a company to grow the revenue base via mobile traffic. Included companies need to have a revenue base where mobile revenue is additive or at least the legacy desktop base is low enough that the impact of the switch to mobile is minimal.
The company can obtain revenue from selling ads, subscriptions, products, or services. Doesn't matter as long as the company benefits from the trend towards mobile devices. In that essence, any mobile device makers, chip suppliers, or similar technology companies aren't included. Most of these companies already have substantial revenue bases. The shift to smartphones and tablets is only providing limited growth from previous phones.
As a concept, mobile payments aren't included though limited public investment opportunities exist considering Square isn't public and PayPal is part of the much larger eBay (EBAY).
Back in 2011, Gartner forecast that worldwide mobile advertising would reach over $20B after hitting just over $3B in 2011. The following table lists revenue by region:
Conversely, eMarketer forecasts U.S. mobile advertising reaching nearly $12B in 2016, up from only $1.5B in 2011. The following table breaks out the different categories:
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 was 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.
The list of stocks is naturally very arbitrary as the qualifying definition can be different amongst every investor. The goal was to exclude the large cap stocks and focus on the generation of stocks that will benefit from the pure growth in mobile traffic. These stocks could grow from a small cap to a large cap.
In that essence, the goal isn't to find a company growing mobile traffic and hence revenue, but rather to find companies where mobile traffic is additive. Whether a company such as Millennial Media (MM) focused exclusively on mobile advertising or Kayak (KYAK) that is leading the revolution of researching and booking trips on mobile phones.
Naturally, this excludes the previously mentioned Facebook and Google and most definitely eliminates Apple (AAPL), even though the latter created the shift to mobile traffic via the creation of truly functional smartphones and tablets. The company already has a massive revenue base and won't benefit from any significant shifts in the ability to monetize the traffic already on its phones.
The below list is an initial effort to establish some of the leading companies benefiting from the shift to mobile data. Future iterations of this monthly report will look into modifying the stocks to add new ideas and eliminate ones no longer meaningful. The stocks were placed into sectors in order to highlight and provide some diversification.
The stocks benefiting from the shift towards mobile advertising and marketing probably provide some of the best valuations in the sector. The well-documented shift from digital dollars to desktop dimes to mobile pennies helped push down these stocks.
Regardless both Millennial Media and Velti (VELT) have had explosive growth.
Millennial Media - the company operates the 2nd-largest mobile advertising network behind Google. Being a mobile specific company, Millennial lacks any of the legacy issues of traffic moving to mobile. All traffic is additive to them. The company operates the largest independent mobile ad network. Previous Stone Fox Capital articles can be viewed here.
Analysts forecast nearly 57% revenue growth in 2013 with limited earnings.
Velti - the company operates a leading mobile advertising firm. The company has 100% mobile traffic as well. The stock has been hit as large DSOs based on an advertising payment model concerned investors. Previous Stone Fox Capital articles can be viewed here.
Analysts expect 31% revenue growth in 2013 though analyst estimates have tended to be too low. The company is one of the most profitable in the monetization index with forecasts for earnings approaching $1 next year.
The wireless gaming sector is benefiting from the movement to 4G wireless networks and tablets allowing for pure gaming on the move. Unfortunately, most of the companies in the sector are either private or part of larger companies focused on consoles or Facebook. Glu Mobile (GLUU) provides the one pure play identified so far.
Glu Mobile - the company has been a leading mobile gaming provider originally licensing games for feature phones. Now the company is mostly focused on games for smartphones and tablets. Glu will release roughly 18 mobile games in the 2H 2012 providing the largest launch in company history. See article here.
Analysts expect a 36% gain in revenues in 2013 with the company becoming profitable in the process.
Sector: Real Estate
The real estate sector is a prime example of mobile allowing consumers to access data when on the go. Via Trulia (TRLA) and Zillow (Z) apps, consumers can review house data while driving around a city. No longer do they need to write down the address to review the house stats later or call an agent.
Trulia - the company provides residential real estate information. It just completed an IPO where it raised nearly $85M. For the six months ended in June, the mobile products accounted for 20% of traffic. With an annual run rate of $58M, Trulia remains a relative small company to where the shift to mobile will be very additive.
Zillow - the company provides a leading real estate information marketplace. Starting in Q1, the company reported more homes viewed via a mobile device than the web. In July 2012, 168M homes were viewed via Zillow Mobile on 13 different apps across every major platform.
Analysts expect revenue to grow 46% in 2013 while earnings will more than double to $0.69 a share.
Sector: Social Media
Social media provides some of the best ways to grow mobile traffic whether via Facebook or Pandora (P) and Yelp (YELP). On the flip side, while this sector offers huge growth, the issue remains whether these services can be ad-supported. Consumers love using these services, but paying for the services or dealing with ads is a completely different issue.
Pandora - the company is a leader in customer-radio internet services. eMarketer recently listed the company as a leader in mobile ad revenue. In Q2, mobile revenue grew 86% year-over-year to nearly 60% of total revenue. Unfortunately, this mobile growth is coming at high costs as content costs accounted for roughly 50% of revenue.
Analysts expect 43% revenue growth in 2013 with slim profits of $0.08 a share.
Yelp - the company connects people with great local businesses via more than 30M local reviews. The mobile app was used on 7.2M mobile devices per month in Q2, up 70% year-over-year. The company is not monetizing traffic on the mobile app yet, but the future could be promising with over 40% of all searches already on mobile devices. Read our article here.
Analysts expect 47% revenue growth in 2013 with slim profits of $0.05 a share.
Travel remains a top internet ad generating sector. Customers searching on popular websites such as Priceline.com (PCLN) or Expedia (EXPE) are typically willing to spend thousands of dollars on booking a trip. Hence, marketers have been willing to spend a lot heavier on this sector than others. The question remains whether mobile traffic will be used for more than research, as customers might prefer to book via the desktop. Here the shift to tablets might propel the booking towards mobile.
Kayak Software and TripAdvisor (TRIP) provide a couple of compelling opportunities where mobile traffic could change the current leaders in the sector. The sector is more established than the other with both of these companies already very profitable.
Kayak Software - the company proclaims itself as the best place to plan and book travel. It has one of the leading mobile apps, as customers are more likely to use its service to compare travel options as opposed to viewing multiple websites on a desktop. Kayak also sees the mobile traffic as additive with customers typically going online to book the trip after researching on a mobile device.
While mobile queries were up 97% year-over-year, it only totals 18% of total queries. The revenue base in Q2 was only $2.6M even with the mobile RPM jumping 40%. The website RPM increased as well suggesting the traffic isn't being cannibalized. See our analysis here.
Analysts forecast nearly 25% revenue growth in 2013 with earnings exceeding $1 per share.
TripAdvisor - the company provides a travel research platform that aggregates reviews and opinions of members about destinations and accommodations. The original analysis back in February after the spin-off from Expedia was mixed after the company provided weak guidance for 2012.
During Q2, total mobile app downloads reached 22M, up more than 200% over last year. It reached more than 27M unique users via mobile devices during May. The company introduced Mobile Upgrade for Business Listings during Q2. Interesting though the company is not as aggressive on monetizing mobile as Kayak.
Analysts expect 19% revenue growth in 2013 with earnings hitting $1.78 per share.
The main point of creating this list was to provide investors a comprehensive list of companies benefiting from the transition to mobile. Whether the stocks appreciate from current levels is a different story. Some of the stocks are currently very expensive making future gains difficult.
Investors convinced that the monetization of mobile traffic will only explode in the future should use this list as a launching point for understanding these companies and slowly adding the more attractive valued stocks as the market provides opportunities.
The stocks on the list all have the potential for explosive growth and long-term valuation creation. As always, the question of finding an attractive price is always the dilemma. Oddly though, the better valuations appear in the mobile-only stocks such as Glu Mobile and Velti, while the social media stocks are the most expensive with questionable paths to profits.
If enough reader interest exists, this can become a monthly article that reviews the results of the index stocks as well as any major company updates. Not to mention, the index can be updated to include new opportunities as this exploding market will undoubtedly change going forward.
Disclosure: I am long VELT.
Additional disclosure: Please consult your financial advisor before making any investment decisions.