The Anti Facebook Trade – Adtech Winners…Clearly, Facebook is the Loser but where are all those digital advertising dollars going to go? Just happens to be in your backyard you have two great adtech players that sit along the same vertical but don’t directly compete with each other. A real east coast/west coast feel to it with Acuity Ads based in Toronto and GoodLife out in Vancouver.
So Let’s take a look;
Congratulations GOOD.V team and investors. I have been skeptical of this management team and how its handled being a public company how its diluted existing shareholders. As a result, I was skeptical it would be able to close the Impression X and 495 Communications acquisitions without significant dilution.
This made modelling out 2019 numbers virtually impossible which the resulting uncertainty which has in my opinion pressured the stock.
Non-Dilutive Capital Secured
Gaining access to 11.25M in debt financing has set these guys up to accelerate and follow through on their already announced acquisitions. Couple critical points here;
1. $5M revolver to help with working capital as they were still cashflow negative in Q3 and A/R will continue to build in Q4. Due to Q4 making up to 50% of fiscal year revenue securing a working capital revolver removes liquidity concerns for day to day operations can be relieved.
2.Acquisition Line to close recently announced acquisition. Even though the majority of the 495Comunications acquisition is strategically and well structured as back end weighted on a performance earnout basis they still have to pay 4.5M up front in cash. With this access to capital no problem. Deals will be closed!!!
Still haven’t heard if a whole whack of purchase warrants were attached to debt agreement and at what interest rate. Not very transparent in PR.
Introduction of 2019 Projections
Modelling out a 25% Core organic growth on the business and assuming 45% Gross Margins and 20% EBITDA margins gets me to a core business of 25M in Revenue and 5M in EBITDA.
ADD:
450 Communications (18.1M Revenue 3.3M EBITDA in Trailing Twelve Months) so for 2019 lets model aprox. 20M in Revenue and 4M in EBITDA.
EQUALS:
45M in Revenue and 9M and EBITDA – This doesn’t even include any of the upside moon shots of 1)A/R Blockchain Solution 2)Ampd Walled Gardens Project 3)Entrance into Video Gaming Ad Space. I still haven’t included any numbers from the Impression X acquisition because I still have no clarity into that business but it clearly is a upside driver.
On Valuation
Using a 10-12x EBITDA multiple which I believe is even conservative for this secular growth space using a 100M share count I get to a price target of 0.90 – 1.08/share or 0.99/share at the midpoint which equates to up to 500% upside!!!
This company is executing, now that everybody has taken their tax loss after everyone has blown out after the IPO this year this is set up for a Booming 2019 now that they can stop diluting shareholders.
I really want management to bet on themselves, your stock is down from 0.50/share down to 0.165/share. Show some belief in yourself and give confidence in the market and BUY stock in the open market!
The Other option…
Along the same vertical with GoodLife Networks there is Acuity Ads Holdings Inc. which is a slightly larger holding for me. A couple of Reasons; Faith in Management, Visibility in Business, Longer Operational History, Short Term Dislocation in Fundamentals Since Q3 & Revision in Estimates
Faith in Management
I have more faith in Tal Hayek a serial entrepreneur and founder with a computer science background then Jesse Dylan with a Journalism background. I am not taking a shot at Jesse because he has clearly had a successful career but I will back the computer science individual every time in a tech story in a small cap name where CEOs have to be so hands on.
It even goes a level deeper to the board level. If you look at Acuity Ads and its board you will find Sheldon Pollack. The deal man from Ov2 Securities who has a long history of guiding tech companies and the eventual sale of these businesses. If you look at Canada Insider he alone has bought more than 100,000 shares in the open market in the last month for around an average price of 1.05/share and at GOOD.V… NOTHING SINCE THE IPO!
Visibility into the Business
The QoQ change in revenue is so heavily back weighted for both business but the GOOD.V story Q4 revenue number is just massive relative to FY as a whole. This is not a negative but makes forecasting the business tougher.
When I look at AT.V I see analyst coverage that puts an extra set of eyes on it in addition to management already gave you October revenue figure (Greater than all of Q1!!!). As well we usually get Q4 preliminary guide early in 2019 so we don’t have to wait all the way to March/April to find out how their end of year was.
Longer Operational History
Pretty straightforward here, always increased risk with a newly public company with limited operational history with GOOD.V compounded by the first fact with limited management experience.
Then a I look at AT.V experienced team that have already proven they can manage through tough times. When all things looked bleak coming out of the European client removal last year and to return to record revenue in a year has been quite impressive.
Short Term Dislocation in Fundamentals Since Q3
Both reported strong Q3 numbers at the end of November with GOOD.V essentially flat since Q3 and if you look at AT.V its down 20% since Q3 was reported. Granted in a different tape I think both of these names would be up materially from Q3 reports.
Revision in Estimates
Since there is no analyst coverage on GOOD.v you can only look at the internal revenue guide which they have maintained since August when they initially put out that impressive $20M revenue guidance numbers
When I look at AT.V, after Q3 was reported revenue estimates were raised by around 10-15% for both FY18 and FY19 and if you take a step further and look at price targets have been raised by aprox. 35% to 2.00/share up from 1.50/share.
This massive delta in share price is the opportunity for the trade coming out of tax loss selling season now; stock traded at 1.18/share before Q3 was reported and if you add the 35% to that from the PT bump you should be looking at 1.60/share instead it trades at 1.02/share. That alone is a 55% to just make up that up.
As an aside; AT.V remains my top takeout candidate for 2019…
LONG GOOD.V (High Execution Risk/High Reward) and AT.V (Triple Digit Upside on Takeout and Battle Tested)