This article is the fifth in a monthly series to analyze the stocks at the forefront of the monetization of the trend towards mobile data traffic. The original mobile monetization index highlighted the leading public companies and defined the concept.
The expectations for the monetization of mobile traffic continued to increase in January following solid results reported by Facebook (NASDAQ:FB) for Q4. While analysts continue to become more bullish on the concept due in part to adoption of larger screens for mobile devices, the question for most companies continues to mount on whether the revenue rates can justify the higher costs.
As expected, the mobile monetization stocks continue to have eventful months. With a strong stock market in January, these high beta stocks had robust returns during the month. The real estate sector had a phenomenal month, with Trulia (TRLA) soaring nearly 62% and Zillow (NASDAQ:Z) over 36%. The companies struggling to produce strong, consistent profits continue to have rough months, while the stocks with strong earnings potential bounced back from a flat December.
In total, the index had a great month on both an absolute and relative basis as the market became more bullish on the mobile monetization theme and growth stocks in general. The roughly 15.2% gain of the index stocks easily outperformed the Russell 2000 gain of 6.2%.
The stocks helping the shift towards mobile advertising and marketing had a very weak January after a mixed month in December. The stocks continue struggle even as Facebook is able to ramp up advertising revenue.
Millennial Media (NYSE:MM) - the company operates the second largest mobile advertising network behind Google (NASDAQ:GOOG). The stock has been on a significant weak streak, even with a strong stock market.
As mentioned last month, eMarketer expects revenue to now jump to over $138M in 2013 from $115M originally expected back in September. Interestingly, the 20% increase in expected revenue gains had only a limited impact on the stock that quickly dissipated to lows not seen since early September.
Analysts have only slightly upgraded earnings estimates on the company for 2013 since the report. The stock now trades at just over 3x the expected revenue of $286M for 2013. As investors start looking at 2014 numbers, expect Millennial to finally get a bid from the market.
Velti (VELT) - the company operates a leading mobile advertising firm providing for 100% of revenue from mobile traffic. The stock continues its wide swings as the earnings potential is bumped up against disappointing results.
While the stock started the month on a strong footing, the analyst day to end January caused a massive sell-off, leading to a 17% loss for the month. See our summary here.
The stock continues to be valued at less than 1x very profitable revenue, yet the company forecasts strong growth after a transitional year in 2013. On both revenue and earnings metrics, Velti is consistently the cheapest stock on this list.
The mobile gaming sector remains one of the weakest sectors at predictably monetizing demand. While demand continues to expand, the consistently shifting landscape has made it difficult to generate profits. Since the only focused public company remains very small, Zynga, Inc. (NASDAQ:ZNGA) is being added to the list, as it generated 21% of Q4 bookings from mobile.
The sector may obtain other entrants in 2013 as either Rovio, the developer of the Angry Birds franchise, or Kabam goes public. Both moves to take these companies public might signal the end of creativity at the firms, based on the recent success of the private game developers. As an example, the developer of the very successful Minecraft franchise began with only one developer, and now Mojang only totals 25 employees. Success is not apparently guaranteed by throwing assets at a game, as would be the case if either Rovio or Kabam become publicly traded entities.
Glu Mobile (NASDAQ:GLUU) - the company remains a leading independent, mobile game developer. While the stock had a successful January with a 13% gain, it has already headed towards new lows in February due to weak guidance for 2013.
While insiders purchased significant shares in the last few months around $2.25-$2.30, so far, the results suggest management isn't capable of predicting future success. The company plans to revamp its development platform to make games more interactive and social. With a market cap hovering around $135M, a hit game such as Angry Birds or Minecraft could make investors rich. Unfortunately, the past suggests that the next big games will come from unknown private firms, and not large publishers.
Zynga - As mentioned above, the company is quickly shifting from a focus on the Facebook network towards mobile gaming. With 72M MAUs on mobile, the shift is quickly moving forward, unfortunately though, the firm is plagued with plunging demand for social gaming.
With a market cap of $2.3B, Zynga becomes the 2nd largest stock in the index. Analysts expect revenue to drop in 2013 to around $1B. The stock is now cheap on a revenue basis if the company can begin growing again heading into 2014.
Sector: Real Estate
The sector had a fantastic month, mostly due to the improving real estate market after both Trulia's and Zillow's stock had subdued prior months. While consumers clearly enjoy using the services via mobile, investors had in recent months shown signs of rationalizing the valuations based on Q4 guidance. January, however, saw Trulia surge to all-time highs, suggesting investors had a major change of heart on the sector.
Trulia - a leading online marketplace for homebuyers, plunged in December in sympathy with Zillow. The stock took off as December ended, however, and remained that way throughout January. The generally improving real estate market, along with a strong Q3 report, set the tone for the rally.
The stock now has a valuation of nearly $700M after the large gains. Even after the huge beat in Q3, analysts only expect earnings to hit $0.17 in 2013. The stock trades at roughly 7x the 2013 revenue estimates, even with expectations of 45% growth.
Zillow - a leading real estate information website, likewise saw strong stock gains in January. Conversely, analysts have lowered earnings forecasts for 2013 to only $0.49, leaving the stock at an expensive 75x forward earnings. Analysts do expect revenue growth of 40% to $156M, making the $1.2B price tag in line with the valuation multiple of Trulia.
Sector: Social Media
The social media sector continues to provide mixed results with a rebound in the stocks, though earnings remain distant as costs soar to support growth. Pandora (NYSE:P) continued the rebound from December, while Yelp (NYSE:YELP) bounced with the market. The sector remains income-challenged, so any rebound might only be temporary.
Pandora Media - a leader in customer-radio Internet services, the stock has quickly rallied from the $7s to nearly $12. With the stock trading at levels not surpassed for any lengthy period since early 2012, investors beware.
The stock gained as the audience metrics showed the listening hours soaring 47% in January to 1.39B. Active listeners were up 38% to 65.6M as well.
Considering the demand story has never been an issue with Pandora, the question remains whether the company can turn that listener base into profits. Analysts forecast a small loss in the fiscal year ending in January 2014.
Yelp - the company connects people with great local businesses via more than 36M local reviews, up from 33M sequentially. The stock had a volatile January on fears that Facebook would implement search technology that would compete against the company. While the fears were overblown, it still hasn't changed the ability of the company to profitably monetize its revenue growth.
The mobile apps were used on 9.2M unique mobile devices. The company forecast revenue growth of 53% for 2013, but the EBITDA margins will only hit 10%, suggesting another year of fast growing costs.
Travel remained a top performing sector, though with much less volatility as Kayak Software (NASDAQ:KYAK) worked on finalizing the buyout from Priceline.com (PCLN). TripAdvisor Inc. (NASDAQ:TRIP) had a great month with a 10% gain, and hit an all-time high in early February.
Kayak Software - the company that proclaims itself as the best place to plan and book travel apparently became one of the few underperforming stocks in January due to the pending buyout from Priceline.com.
Though Priceline.com expects to fund over 70% of the transaction price via stock, the volatility of Kayak will be tied more to the bigger company, and will not offer the same gains as the other small caps in this index.
TripAdvisor - the company provides a travel research platform that aggregates reviews and opinions of members about destinations and accommodations. The recent Kayak buyout and the stock purchase by Liberty Media (LMCA) have sent the stock to an expensive forward multiple of 25x earnings.
Analysts only expect 20% earnings growth in 2013, making the stock expensive, especially now, that the stock is valued at $6.7B.
As a continued reminder, the index was not created as a forecast of the best investments. Rather, it was created to track the progress of stocks at the forefront of monetizing the huge amount of traffic moving to mobile and the large amount of data created.
As predicted last month, the leading sector of travel appeared maxed out. The leadership position switched to real estate and social media, which had both been weak at the end of 2012. 2013 appears to be another exciting year for the evolution of the monetization of mobile traffic.
Disclosure: I am long GLUU, VELT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please consult your financial advisor before making any investment decisions.