Independent Ad Tech Opportunities With Extremely Negative Market Sentiment

Includes: MM, MRIN, TLRA, YUME
by: Equitable Research


Following Q2 earnings, most independent ad tech companies sold off sharply.

The market fears that competition from Tier 1 players cannot be overcome.

This results in some pretty remarkable valuations for contrarian investors.

In this article, I'm simply going to list some facts surrounding the shares of different players in the ad tech space that have been hammered lately and are sitting at historic lows. The facts are positive and negative. Investors can decide which way they want to play this opportunity, if at all. Most have chosen the sidelines, as none of the companies that I will discuss have extraordinary short positions, despite what the current extreme negative market sentiment would suggest.

Millennial Media (MM)


  • Over 90M in cash, enough to last well in to 2016 or beyond, even with losses. Sufficient cash to see the turnaround through.
  • Heavy recent insider buying from the CEO and other executives that exceeded over $1M and is now significantly underwater.
  • Recent 9.8% stake disclosed by Brent Oxley, dot com guru and founder of Host Gator.
  • Trades at an over 80% discount to its 2012 IPO price.
  • $179M tax loss credit is worth at least $100M to a potential acquirer.
  • Wisely acquired JumpTap in an all-stock deal when the stock price was more than double current levels.
  • Currently valued at 0.64x EV/TTM Sales, with YOY growth still projected to be over 15% in worst-case scenario transition period.
  • Focus is on new MMX Exchange platform with partner App Nexus. This is the second-largest mobile exchange, and it has grown sequentially in Q2 by 100% in terms of platform buyers.
  • 650M monthly user profiles, including 170M of US users, are generated by the legacy app install business, which is experiencing flat growth due to competitive concerns, but is a significant data mining asset with licensing potential.
  • Owns a vast portfolio of about 80 patents, mostly relating to mobile advertising, and has over 120 pending.
  • New CEO Michael Barnett has brought his team from AdMeld - now Google (GOOG, GOOGL) - which he successfully sold to Google in 2011, over to Millennial Media.
  • Lack of a new CFO announcement and departure of top executive Molly Spillman suggests that the direction of the company is that it will be sold.
  • Pro-forma statements suggest that the core Millennial Media business is in a state of decline.
  • Millennial Media is set to grow slower than the mobile ad spending forecast for 2014.


  • With $68M in cash, no debt and on the verge of long-term profitability, YuMe is in a great fiscal position.
  • Trades at 0.49x EV/TTM Sales, with 25% YOY growth.
  • Recently published acquisition theory is still valid.
  • Q2 margin expansion of 320 basis points to 48.8% suggests that the proprietary PQI optimization engine is exceeding expectations.
  • Advertising spending cuts implemented across the board by the company's top advertising client has caused a FY2014 revenue shortfall.
  • 42% YOY increase in advertising clients indicates that revenues will be more diversified and consistent going forward.
  • 45% YOY increase in sales spending, compared to an 18% increase in revenues in the same period is said to be the result of rapid international expansion initiatives.
  • New VideoReach programmatic platform now operating and potential Q3 report catalyst, as CEO says to expect "more color" on its progress on the call. This product has not been included in the FY2014 guidance.
  • Lowering of FY2014 expectations sets company up to "beat", in line with my theory that this quarter will represent the bottom of this sector.
  • Powerful 2H14 catalyst is the US elections, where YuMe plays a major role.
  • Activist hedge fund Diker Management now largest institutional owner of YuMe as of 6/30/14, after significantly increasing its stake.

Marin Software (NASDAQ:MRIN)

  • A recent article of mine highlighted the compelling opportunity based on several key operating metrics that were all trending up, despite the negative sentiment around the stock.
  • Over $1M in insider buying since earnings highlights the value proposition at depressed levels.
  • Industry-leading SaaS platform generates significant recurring income, with a 100% revenue retention rate and increased YOY take rate in Q2.
  • New CEO, David Yovanno has a strong history in driving growth for ad tech companies.
  • The company is in the midst of a perfect storm in organizational changes, and as a result, suffered sales execution issues that negatively impacted the pro forma FY2014 revenue guidance by $1.5M.
  • SaaS model reaps the highest valuations in the tech sector when sentiment is positive. Marin trades at a tenth of the P/S multiple of Workday (NYSE:WDAY), which is an SaaS platform with a halo market sentiment but has lower gross margins than Marin.
  • On the Q2 call, Marin reiterated that the 2H15 target for long-term profitability is still on track.
  • Perfect Audience acquisition provides operating leverage by building out display offering which can be integrated into the Marin platform and sold to existing clients for little additional incremental cost.
  • Support for Twitter (NYSE:TWTR) advertising is a potential near-term catalyst that will drive revenues.
  • Natural acquisition target for the likes of Salesforce (NYSE:CRM) and Oracle (NYSE:ORCL), both of whom have made similar bolt-on acquisitions in the past of SaaS platforms that are easily integrated into the respective product suites.
  • Over $80M in net cash is sufficient support on the road to 2H15 profitability, despite expected near-term losses.
  • Cloud-based platform with 21 consecutive quarters of revenue growth and 33% YOY active advertiser growth.
  • The main competitor is Google itself and its AdWords Conversion Enhanced product. As Marin derives a considerable amount of its revenues through access to the Google API, this creates somewhat of a competitive risk but also another potential acquirer, depending how Google views Marin.

Tremor Video (TRMR)

  • At 0.47 EV/TTM sales, Tremor represents the best value proposition in the entire ad tech universe.
  • Consistent YOY revenue growth is overshadowed by perceived weak relative gross margin rate of 33.9% in Q2.
  • Impressive surge in usage of new multi-screen product, which now represented 21% of Q2 revenues, up from a tiny base in Q1.
  • Operating leverage gaining traction, as indicated by 300 basis point YOY reduction in sales expense as a percentage of revenues.
  • Feeble recent insider buying leaves shareholders wondering about the value proposition if executives cannot commit capital to the cause.
  • Trades at a 70% discount to its IPO price only 1 year ago. This, despite exceeding revenue targets for the past 3 quarters.
  • The only independent ad network to be focused exclusively on video, and more specifically, the fundamental shift of TV brand advertiser dollars to online.
  • CFO Todd Sloan suggests during a recent conference that rapid consolidation in the industry is imminent, and praised competitor Adap.TV for its "exit".
  • The same CEO and CFO team successfully sold to PriMedia nearly 15 years ago.
  • Global CRO of Bloomberg, Paul Caine, joined Tremor as a board member during Q2.
  • The company has an enormous $1.66 per share in cash. Given the current minimal cash burn, this represents several years of available funding for the company in a worst-case scenario of not imminently becoming cash flow-positive.
  • The lowest analyst price target is double the current share price, which suggests extreme negative investor sentiment.
  • Sales growth expected to increase YOY in 2015 at an increasing rate, and the net loss is expected to decrease. This illustrates the improved operating leverage that the company discussed on the Q2 call. The next stop is profitability, which will be the inflection point.

I believe that all of the companies that I have profiled will be immediately profitable if acquired by a larger entity due to economies of scale and duplication in SG&A. These companies that I am covering here represent my favorite market opportunities. My weighting is relatively equal between them, and they currently represent collectively about 75% of my long portfolio. I have been a big buyer during the past week, and will continue to accumulate on further weakness in these names.

Disclosure: The author is long YUME, MM, MRIN, TRMR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is short WDAY.