Being Picky in AdTech -- Look for Profitable Hyper Growth…This is the best setup I have seen in some of these AdTech names in a long while. Coming off the bottom of 2020 base rates and ad spending re-accelerating, we another year farther along the secular shift to digital and programmatic advertising that continues to grow at a double-digit pace.
Look no further than the Facebook Q2 earnings call, ad pricing up 50% YoY. The demand for eyeballs is massive.
Some of the valuations in the space have gone straight parabolic in the space, we are talking 10-20x Sales.
Time to find the next one. For that, I think we have to go down market cap. I think the Acuity Ads example from 2020 is the perfect example as what I am looking for. If you look at their FY21 1H Self-Serve Revenue of $11.9M vs FY19 H1 Self-Serve Revenue of $13.5M – Their core Self-Serve business is actually down 10% yet the stock has 10x higher!!!
The power of a change in narrative about this next step in advertising having a niche angle to grow into. In AcuityAds case it was around the rollout of their new DSP platform.
When you are able to buy these AdTech businesses right as they reach some level of EBITDA Profitability/Breakeven in these niche growth areas good things tend to happen.
Well, I think I am sitting on 3 of them, all in slightly different niches; $SPN.V $KIDZ.V $ZOMD.V
What do they have in common?
1. All have guided to Q2 growth rates >50%+
2. EBITDA Profitable
3. Clean Balance Sheets w Net Cash
4. Ownership of First Party Data or GDPR/COPPA Compliant
5. Scalable Platforms w Programmatic Offerings
6. Geographical & Product Suite Expansion
Snipp Interactive Inc. - $SPN.V
<2x FY21 Sales & EBITDA Positive
This is the turnaround play and my favourite, they rightsized the business after burning cash and now backlog is starting to grow again. As of Q4 Backlog was up 49% YoY, flowed by further acceleration in Q1 up 60% YoY.
Then they dropped the hammer in their Q1 release;
We anticipate our Q2 revenue growth to be over 50% with sustained growth over the next few quarters. Consequently 2021 is shaping up to be a significant and profitable year of growth for the company," said Atul Sabharwal, Founder & CEO.
Timing these inflection points is everything. You are going to get 50%+ revenue growth on a depressed valuation so you are going to get the double whammy of multiple expansion on top of growth.
Direct access to first party purchase data with no dependence on cookies, this is the goldmine and where I see a lot of advertising going.
The hook here is the client base, from Proctor & Gamble, Unilever Starbucks, etc. and taking the base of clients and expanding geographically, across product lines and scope expansion within it. There is growth here for years without even adding an additional client. You throw a true ad engine on this thing… it could explode higher.
With Gross margins that can run >70% it is much more profitable model as it is more of a holistic B2B SaaS offering than the typical AdTech business that runs in the 30-50% range. Might not be quite as scalable as the other two but the margin profile of the business and the stickiness of the client base makes me think it has much higher to go.
Put anywhere from a 5-8x Sales multiple on that business 0.30 - 0.48/share or call it 0.40/share at the midpoint. A lot of ways to win here as they take mare dollar spend across each of the verticals with pre-existing clients
Kidoz Inc. - $KIDZ.V
6x FY21 Sales & EBITDA Positive
This is a very niche play targeting directly into Kids advertising using more a contextual approach that is COPPA/GDOR compliant vs the more traditional targeting methods.
Big thing here is the launch of a truly programmatic offering, all this growth before they really have touched the real unlock of these ad platforms right as their core monetizable impressions on their platform is exploding.
From recent release;
256 million monetized impressions were delivered during the second quarter of 2021 recording 33% growth over the 192 million paid impressions delivered in the first quarter of 2021;
115 million video views were delivered during the quarter representing a 35% increase over the 85 million video views in the first quarter of 2021;
Over 100 Million rich media ads were played in the second quarter of 2021 for 38% growth over the 72 million in the first quarter of 2021;
Paid App Installs and from the Kidoz App Promotion campaigns business line grew by 240% in the second quarter of 2021 over the first quarter of 2021.
With a locked in developer base through the SDK and now starting to partner with global partners across Europe and just starting to tap into China I think this one has the best chance to see a very strong acceleration in the growth rate.
I am pushing on valuation here because I think this one has the deepest moat of the three in the SDK (Standard Design Kit) which is essentially a monetization engine that other aps developers that can build on.
Put anywhere from a 8-10x Sales multiple on that business 0.90 – 1.15/share or 1.02/share at the midpoint. I think it’s in the out years if they can keep up this 30-50% growth rate where this one gets very interesting but you gotta be right on the growth rate.
Zoomd Technologies Ltd. - $ZOOD.V
1x FY21 Sales & EBITDA Positive
This is the one that I think has the most upside given starting valuation and reminds me the most of AcuityAds a year or so ago.
Just launching a true Self-Serve offering that is tied directly into a white labeled DSP with performance analytics. Sounds familiar…
And how has the launch gone;
- Revenues in 2Q21 are expected to be $11.1M, a year-over-year increase of 96%
- Strong revenue growth was driven by the onboarding of new clients in recent months and growing existing customer's business successfully
- Adjusted EBITDA in 2Q21 is expected to be $1.3M versus a $(0.76M) loss in 2Q20, reflecting robust topline growth
- Operating profit in 2Q21 is expected to be $0.6M versus a $(1.44M) loss in 2Q20
Whether it is meaningful to revenue or to potential advertising clients I think it has to be mentioned. That they are already a certified marketing partner within the TikTok platform. When you look at where advertising is going hard not to say this is not a critical piece of it going forward.
The hook here is the integration into all the major platforms. From Facebook, Google Ads, SnapChat, Unity, etc. They integrate into the search functions with these publishers so they work with them not fight against them as a plug in to these platforms.
Put anywhere from a 5-8x Sales multiple on that business 1.95 – 3.15/share or call it 2.55/share at the midpoint. This could get parabolic in a hurry…
IN CONCLUSION
There is a lot of ways to go in this space to get sucked into sexy pitch decks that say they are investing to grow and are burning piles of cash and just focus on some massive TAM number they throw at you.
That’s great, but find me the ones that are doing it profitably, the ones that are growing revenues faster then they are spending, the business propositions that sell themselves & the ones that are profitable when they are subscale that when they grow, they will just throw of piles of cash in profits.
Find me the ones that check all 6 of the boxes and I will be all over that bid.
1. All have guided to Q2 growth rates >50%+
2. EBITDA Profitable
3. Clean Balance Sheets w Net Cash
4. Ownership of First Party Data or GDPR/COPPA Compliant
5. Scalable Platforms w Programmatic Offerings
6. Geographical & Product Suite Expansion
LONG – SPN KIDZ ZOMD