Analyzing The Millennial Media IPO

| About: Millennial Media, (MM)
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Several interesting IPOs went public this week. The leading ones include mobile advertising provider Millennial Media (MM) and Annie's (BNNY), both soaring over 100% from the IPO price at one point. While the organic bakery market is interesting, in this article I wanted to focus on the rapidly growing mobile advertising market. This space became more appealing recently with the great results posted by Velti (VELT) a few weeks back. Now with the IPO of Millennial Media, the sector now offers a couple of good investment options.

Millennial Media
The company is the leading independent mobile ad network provider. Its technology, tools, and services help developers maximize their advertising revenue, acquire users for their apps, and gain insight about their users. The company has a proprietary tech and data platform known as MYDAS, that determines which ad to deliver in real-time.

In February 2012, the platform reached 300M unique users worldwide, including 140M unique users in the US. More than 30K apps are enabled by their developers to receive ads delivered through the platform on 7,000 different mobile device types. Over 45B impressions were processed for the month. Advertiser clients include 23 of the top 25 national advertisers as ranked by Advertising Age magazine. The developer base includes large app developers such as Zynga (NASDAQ:ZNGA), Rovio, and Pandora (NYSE:P).

As the leading independent mobile ad network provider, the company has a 16.7% market share in the mobile display advertising sector and ranks behind Google (GOOG), but just recently passed Apple (AAPL). This makes it the only one of the top three mobile advertising platforms not affiliated with a particular mobile operating system.

One huge advantage this company has is not being Google. Millennial has the potential to grab all the businesses that want to avoid Google and even Apple. After all, Google has over 70% of the total mobile ad market when including search.

IPO Details
The IPO was priced at $13 raising $133M by offering 10.2M shares. This was the high end of the upwardly revised $11 to $13 range. The company will trade on the NYSE. Underwriters have an option to purchase an additional 1.5M shares, which would raise the proceeds to $152M.

On Thursday, the stock closed up 92% at $25 after rallying all the way to $27.90. With 75M shares outstanding, the company is now worth nearly $1.9B. Read the prospectus here.

2011 Financials

  • Revenue increased 117% to $104M.
  • Gross margins improved to 39% from 34%.
  • Adjusted EBITDA increased to positive $1.8M from a loss of $6.4M.

Key Secular Drivers

  • Adoption of faster and more functional mobile connected devices.
  • Widespread access to faster wireless networks facilitates consumer consumption of content.
  • Mobile usage has disrupted how content is consumed.
  • Growth of mobile app economy.
  • Advertising industry is disrupted by mobile advertising.

Large and Growing Market Opportunity
Downloads from mobile app stores will increase from 8.2B to 108.8B in 2015, representing a compound annual growth rate of 68%.

Complexities of Mobile Advertising
Mobile advertising is complex with a fragmented mobile technology environment due to thousands of different devices accessing hundreds of different networks around the world. The lack of predictable connection quality also plays an important role.

  • Fragmentation of the mobile ecosystem caused by a wide diversity of device types, numerous operating systems and varied delivery and user engagement mechanisms.
  • Limitations in using traditional identification techniques typically used in PC-based web advertising
  • Difficulty in predicting user behavior, including when and where a user will be consuming content on a mobile device.
  • Varying connection quality that a mobile device may have at any given time.
  • Difficulties measuring performance of ads and user interactions with them on mobile connected devices.

Other Mobile Ad Stock: Velti
While not a direct competitor, Velti is the leading global marketing platform that delivers technology and services that enable companies to engage with and reach their consumers through innovative mobile marketing and advertising efforts.

The company has a market cap of only $860M compared to around $1.9B for Millennial Media. The company is also very profitable. Below are highlights from a recent investor presentation.

FY 2011 Review

  • Revenue of $189M with 63% growth versus 2010.
  • Revenue less third party costs of $135M or 70% growth versus 2010.
  • Adjusted EBITDA grew to $53M or nearly double that of 2010.
  • Over 1,200 customers running greater than 4,000 campaigns.
  • Customers with revenue greater than $1M increased from 30 to 43.

Four Structural Trends Fueling Growth

  • User time spent and media spend not balanced. 10% versus 1%.
  • Significant increase in mobile marketing and advertising spend to $29B in 2014.
  • Explosion of mobile phones to 1.5B greatly exceeding PCs and TVs
  • Rapid mobile internet adoption to exceed desktop internet users by 2014.

Explosive Global Reach

  • Company reaches more than 4.3B people greatly exceeding Facebook and other social media options.
  • Currently engage 1.4B users already.
  • Revenue per typical campaign has increased from $100K in 2008 to $250K in 2011.

Velti is still hampered by exposure to Europe with 66% of revenue coming from that region. This is expected to shift more towards the U.S. and Asia in the next few years, with parity being the expectation.

The mobile ad sector expects exceptional growth over the next 5 years. Recent IPO Millennial Media offers an interesting company, but unfortunately the stock soared in the after market, making it too pricey. On the other hand, Velti had an IPO last year and has been virtually ignored by the market until now. The company provides an extremely low valuation for a fast growing company in a fast growing sector. As estimates keep rising for 2012, Velti is trading closer and closer in the 11x earnings range-- incredible for 37% long term growth estimates.

Disclosure: I am long AAPL, VELT.

Additional disclosure: Please consult your financial advisor before making any investment decisions.