As investors continue to weigh high valuations, cautious economic growth, inflation rising slowly, and the inevitable rise of rates, we continue to see risk-off investments in high demand. As some pundits have begun talking about valuation concerns, there seems be a fair number of similarities to the Internet Bubble. Recent IPOs are once again in high demand and facing high valuations without the backing of profitability. One such stock that gives me concern is Rocket Fuel, Inc. (NASDAQ: FUEL). Rocket Fuel is a provider of artificial intelligence-based advertising solutions that focuses on digital advertising campaigns that target a specific type of consumer through social media.
Turning to the fundamentals, Rocket Fuel has a market cap of $883.77 million and is rated a 'strong buy' by analysts. The company is not currently profitable, but is expected to reach those levels in the next year, as seen with a forward price to earnings of 69.67. Price to sales is at 3.19, price to book comes in at 3.36, and price to cash is 4.05. The company has a total debt to equity of .11 and cash per share of 6.21, giving the company a solid current ratio of 4.5. Earnings are expected to fall 7 percent this year and rise 244 percent next year.
The stock faced its IPO in October 2013 and has been on a free fall since, down almost 60 percent year-to date-alone. To make matters worse, short sellers have moved in and command a short float of 13.84 percent and insider transactions are down 51.28 percent. This signals lack of confidence, among other things and should be taken bearishly.
While analysts are still very bullish on the stock, we have seen two institutions reduce estimates and downgrade. Earlier in May, Oppenheimer maintained its 'outperform' rating on the stock, but reduced the price target from $66 down to $44. On the same day, BMO Capital Markets downgraded the stock from an 'outperform' to a 'market perform' and slashed its target price from $58 to $25. While the overall ratings are still bullish, the recommendation figures fail to consider major price target cuts, as we have seen. If the stock continues to underperform, we could see a rash of downgrades from these bullish ratings.
Overall, I think Rocket Fuel is a name to avoid at this time due to the nature of the market conditions right now. Jim Cramer recently stated he was worried about a handful of recent IPO names that bare similarities to the 2000 bubble and on the list was Rocket Fuel. While the company's concept may be solid and worth its weight, the valuation is certainly a concern when you consider the company not being profitable. Investors be sure to do your own research to determine your own investment actions.