AcuityAds Holdings Inc
illumin Execution and Visibility Is Improving; Upgrading to Outperform
Our view: Following in-line Q1/23 results, our $3.50 price target is unchanged. Given the continued pullback in the stock against the backdrop of improving illumin execution and visiblity, we are upgrading the stock from Sector Perform to Outperform with a focus on potential catalysts in H2/23 and into 2024.
Key points:
• Swimming nicely upstream. AcuityAds stock has not been immune to industry headwinds that have included concern around the potential impacts of evolving privacy controls, a choppy digital ad market, macro uncertainty, greater competitive intensity within ad tech and higher bond yields. At 0.6x FTM EV/net revenue (versus an average of 1.9x for select DSP and SSP peers excluding The Trade Desk), we believe the stock is more fully pricing in these headwinds. With improving illumin execution and visibility along with a recalibration of expectations, we believe the continued pullback in the stock represents both an attractive and timely entry point with a focus on potential catalysts in H2/23 and 2024.
• Better positioned to execute on illumin. With over two years of illumin commercialization, we believe the company is now much better positioned to execute on the illumin growth strategy reflecting significant investments made in the leadership team, illumin platform capabilities and functionality and sales and marketing. Notably: (i) a more sophisticated go-to-market and implementation strategy is now in place as evidenced by the tracking of multiple internal KPIs around targets, pipeline and conversion; (ii) management is seeing early success in signing multi-year contracts with guaranteed minimums adding to revenue visibility with more than half of new illumin self-serve customers in Q1/23 under such contracts, 45% of overall customers on contracts exceeding one year and 65% of contracts having guaranteed minimums; (iii) the pipeline of active deals is 212 (albeit many of which still in the early stages) versus 103 in Q1/22 with the number of illumin demos at 140 versus 31 in Q1/22; and (iv) illumin functionality continues to expand with the digital out-of-home channel now added, and the social media channel to be added imminently.
• Potential catalysts in H2/23 and 2024. With $12MM in annual run- rate illumin self-serve revenue, the expectation of YoY revenue growth and sequential improvement in net revenue margins in Q2/23 (despite the challenging operating environment), a healthy balance sheet (net cash of $71MM as of Q1/23) and renewed share repurchases (0.7MM repurchased thus far in Q2/23), our focus for the stock at current levels shifts to potential catalysts, which include: (i) any improvement in digital advertising and the overall operating environment in H2/23 and into 2024; (ii) better than expected illumin traction following a recalibration of revenue growth expectations over the past year; and/or (iii) accelerated illumin traction driven by channel expansion (digital out-of-home, social)