Fluent: Short Term Pain But Long Term Gain
Summary
- Fluent turned in a decent FY'20 financial performance, with 11.3% revenue growth and 18.7% adjusted EBITDA growth in spite of the pandemic.
- A shift in business strategy, eliminating lower quality traffic, is expected to result in 11% to 13% revenue drop in Q1'21 versus the same quarter last year.
- The stock has been punished in March/April as a result of lowered expectations and the recent tech meltdown.
- The stock is undervalued according to my relative valuation assessment and I am giving Fluent a speculative bullish rating.
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For a digital performance marketing company, Fluent, Inc. (NASDAQ:FLNT) had a pretty decent 2020 despite the pandemic, with annual revenue growth of 10.3% and adjusted EBITDA growth of 18.7%. During the Q4'20 earnings call, management indicated that they had landed three large enterprises in 2020, bringing the total to five of the top twenty largest companies in the world as customers. But, that is where the good news ends. Fluent is making a move to go upscale by eliminating lower quality traffic in an attempt to attract more Fortune 500 companies:
In 2020, we commenced a Traffic Quality Initiative, to further enhance our value proposition for our clients and position Fluent as an industry leader. We see our commitment to higher quality traffic as the road to sustainable growth, notwithstanding a reduction in our near-term revenue profile during this transition.
The end result of the initiative is an estimated 11% to 13% reduction in revenue in Q1'21 versus Q1'20. My initial reaction was the same as Mr. Market. The selloff was steep.
(Source: Seeking Alpha/MS Paint)
The stock took a haircut of 50%, dropping from a high of ~$7.80 to a low of ~$3.90. The recent stock price of $4.10 is near the support level formed in December 2020. With the strong pullback, now may be an opportune time to buy stock in the company.
Short Term Pain, Long Term Gain
On the positive side, the company expects a return to its historical growth trend of 14.2% CAGR in a 'couple of quarters' as the quality initiatives take hold. And the onboarding of recently acquired large brands takes a fair amount of time and effort to get them up and running.
(Source: Fluent)
While the short term may be painful for Fluent's investors, I expect that the long term picture will be much rosier as the economy picks up steam as the pandemic subsides.
Another positive factor in Fluent's favor is that Alphabet (GOOGL) has plans for phasing out Chrome's third-party cookies which are used by many digital marketing companies. Fluent has a large number of digital media properties from which to extract users' preferences by use of surveys and other techniques. Currently, the company is getting 900,000 daily registrations.
Stock Valuation
For valuing growth stocks, I employ a technique that uses a scatter plot of certain fundamentals to determine relative valuation for the stock of interest versus the remaining 200+ stocks in my digital transformation stock universe.
The Y-axis represents the enterprise value/forward gross profits estimate, while the X-axis is the estimated forward Y-o-Y sales growth. The plot below illustrates how Fluent stacks up against the other stocks on a relative basis based on forward gross profit multiple.
(Source: Portfolio123/private software)
A best-fit line is drawn in red and represents an average valuation based on next year's sales growth. The higher the anticipated revenue growth, the higher the accepted valuation. In this instance, Fluent is situated well below the best-fit line, suggesting that the company is undervalued on a relative basis relative to its peers. This is not unexpected, as digital marketing doesn't really capture the attention of Wall Street.
I have provided some other digital marketing companies on the scatter plot for comparison purposes, including Criteo S.A. (CRTO), ChannelAdvisor Corporation (ECOM), QuinStreet, Inc. (QNST), and Digital Media Solutions, Inc. (DMS). QuinStreet appears to be slightly overvalued at present, while Digital Media Solutions is very undervalued.
Investment Risks
Fluent's strategic business move to eliminate lower quality traffic/digital media properties will have short term repercussions and there is no guarantee that revenue will bounce back, or that the company will achieve its goal of landing more Fortune 500 companies.
Digital performance marketing is a very challenging market niche, challenging not only due to strong competition but also government regulations. Data privacy laws are becoming more difficult to navigate, and the rules are different for individual countries. Companies such as Fluent tend to push what is acceptable and this is reflected in the ongoing legal issues that the company faces, some of which may significantly impact company financials, all pertaining to various U.S. governments.
Summary and Conclusions
Fluent operates as a digital performance marketing company with more than 500 clients, including five of the twenty five largest companies in the world. While the company performed well in 2020 with revenue growth of 11.3% and adjusted EBITDA growth of 18.7%. The next couple of quarters are expected to be impacted by the company's shift towards higher quality traffic. The strategic shift is intended to attract more large companies. The company management expects YoY revenue to drop by 11% to 13% in Q1'21 but return to normal growth by historical standards over the longer term. The five-year CAGR is 14.2%.
The stock has taken a pretty significant hit recently, down 50% from its high. This presents an opportunity to enter a long position while the stock is quite undervalued relative to its peers.
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This article was written by
I have been trading stocks, commodities, and options for more than 25 years. I have honed my skills in quantitative analysis and various stock investment tools for 15 years at Portfolio123 and offer services as a consultant in stock portfolios. I also own the financial data service Equity Analytx which provides aggregated fundamentals for a wide range of industries.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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