Q3 Preview: Growth Rates Accelerating Across w 100%+ Growth…I thought I would take a minute to talk about what I am looking for across the Small Cap Canadian AdTech space going into Q3 reporting season.
This is the best set-up I have seen in any industry since I have been down market cap in broader tech, healthcare & levered turnarounds. Coming out of COVID these companies are going to be putting up growth rates anywhere from 50-200% YoY all profitable as well.
I wanted to write this piece now because as AcuityAds was the flag bearer for the space and just blew up last week and a lot of capital came out of the name and I strongly believe that doesn’t reflect the true inflection in growth that I think that I can present with these three companies and AcuityAds is more an idiosyncratic issues around Self-Serve v Managed Services issue.
Along those lines I am going to point out the Two Year stack Q3 growth rates because I think it’s critical to understanding why I think these companies can multi-bag from current levels and why AcuityAds is struggling – AcuityAds Q3 FY21 v Q3 FY19 Revenue only up 2%...
All in, you are able to get into these companies from as cheap as <1.0x Sales relative to the north star of the AdTech space on the NASDAQ – The Trade Desk (TTD) Trading at >25x SALES. Heck just give me 5-8x Sales and we are talking up to a 10 bagger for some of these and still trading at half the valuation.
Enough sauntering around, Let’s talk Numbers:
1. Zoomd Technologies Ltd. (ZOMD.V)
Revenue - $13.25M USD EST up 100% YoY (FY21 Q3 v FY19 Q3 Rev up 125%)
In the last two months alone, they have already doubled guidance from 30-40% Annual Growth to *at least 80% Annual Growth. Given 1H growth figures this will equate to at least 110% YoY growth in the back half of the year. Q4 will naturally by even larger due to seasonality and the big publisher win with their SEO API product sets them up really well into Q4.
Bigger thing here I think is rate of change. If you are able to double revenue guidance in October since only two months prior guidance in August post Q2 financials there has been a fundamental shift in the growth rate they are seeing in Q3 and bookings into Q4. Adoption of their Self-Serve Offering? Client Growth? Market Share Gains? TikTok? Geographical footprint expansion?
They have a secret growth accelerator built into their client base that I think gets overlooked. With close to 50% of client base coming from Gaming, FinTech, Crypto & Ecommerce they are tied to the fastest growth industry in the economy. As a result, no supply chain issues and as their clients grow in size so do these ad budgets. They are able to grow with their customers. Will also be interesting if there is any mention how the integrations into TikTok is driving customer adoption, they have shown a deft ability to follow the consumer all across the web and aggregate sources of data.
EBITDA - $500K-1M USD EST
Given the growth rate the bottom-line number is not as consequential, but now with their Self-Serve Programmatic offering now fully launched and, in the market, they are capitalizing some of the costs associated with it. But as long as they are operating within cashflow I have no problem with them funneling it all back into growth.
With that said there is a number higher up the income statement that I think is critical to the story, Gross Profit Margin full stop. They have been talking about churning out less profitable business and focusing on higher quality revenue. The launch of their Self-Serve Programmatic product will naturally have higher gross margins. You can already start to see it in the numbers in 1H alone with gross profit margins higher by 342 basis point over FY20 before the Self-Serve product was even in the market.
These businesses are so scalable, especially when they hit this level of scale and inflection point with fixed cost coverage. There is a giant move across the space going to more Self-Serve Programmatic and now that Zoomd has a product in that market you could see margins push up to that 40-50% lvl over time. That double whammy of >80% growth and margin expansion is what multi-baggers are made of.
Looking Forward
It’s all about Self -Serve Programmatic, with their product now fully launched for Q4 you could see a scenario at the end of the month and they are upping guidance again given the adoption rate of their new offering. Not hard to think about them getting to a $15M USD Revenue figure for Q4.
I think they are hitting their next leg of growth, and if that’s the case as adoption picks up and given their client list internal growth, I think they can easily outgrow the secular growth rate in FY22 of 15-20%.
If I project out a 30% growth rate for FY22 that gets me to $60M USD in Revenue or $75M CAD. With 105M shares out that is a current valuation of 0.6x Sales for a business with scalable tech, profitable and growing above the secular growth rate.
TARGET PRICE – 5.0x Sales @ 3.55/share or close to 600% upside if they can get that multiple to expand (Once again, The Trade Desk 25x FY21 Sales)
2. Adcore Inc. (ADCO.TO)
Revenue - $6.25M USD EST up 107% YoY (FY21 Q3 v FY19 Q3 Rev up 107%)
*Not including any incremental revenue from Amphy platform
This is one with the most moving parts yet I still think they are going to put up a triple digit growth rate and with management sounding more confident than ever right out from the Q2 call looking into 2H.
“Bear in mind that as we progress with it, the quarter or seasonality is in our favor. So we have a tailwind now in Q3 and for sure in Q4. And basically, again, 2021 up until now was the best year for the company ever, and we don't see any reason to believe that the Q3 and Q4 are going to look different.”
This will be the first Q we get a look at their full suite integrated under one roof with their marketing cloud solution. I will continue to hammer this point over and over again. As you move to more Programmatic Self-Serve you margin profile and scalability of the business with continue to improve.
They have one of my favourite API integrations in AdTech that I am so bullish on with their advertising solution that is tied directly into the Shopify network. Providing tools within these large platforms is so effective for these smaller AdTech players as it instantly gives them access to such a wide client base at such low costs. A win win for both parties.
It is the one issue with this name we always have to talk about and that is customer concentration with the Tourism Israel contract. It still has another year to go as the platform scales this should become less and less of a concern and as the contract sunsets over time, they can make it up in other markets.
Still find its crazy they have accomplished all this growth without really tapping the biggest market in the United States. With them just going in size in September that leaves a path for big growth into FY22.
EBITDA - BREAKEVEN EST
*Once again have to stipulate that there is going to be a material increase in costs associated with the Amphy rollout and I have no clue how to quantify this. With that said though, they raised $4M CAD early this year to finance this project so there is ample cash to build the platform.
So I am going to stick to the core AdTech platform which I am glad they breakout in the financials. I am going to hit it again. All comes down to Self-Serve Programmatic adoption here as well. I was very impressed Q2 as management initially guided a return to aprox. 50% gross margins by mid FY22. Yet in Q2 Gross margins doubled QoQ up 2,286 basis points.
Depending how they choose to handle the accounting of their newly launched marketing cloud product you could have the Opex Model vary quite a lot but I still think you are going to start seeing gross profit dollars growing at a much faster clip than Opex.
Looking Forward
*Personally, I have no opinion on Amphy and wish they didn’t pursue the EdTech platform but without question it is a lot of upside optionality if it works. Given they raised the capital for it and not putting at risk the core business lets see if it works.
From their marketing cloud launch, Shopify API & entry into the US market the growth set-up into FY22 looks even better than FY21 where I think they are going to grow revenues over 50% YoY
You can already start to see it, with the latest press release in $4M+ in contracts announced all outside of North America in the last 45 days alone.
If I project out a 30% growth rate for FY22 that gets me to $34M USD in Revenue or $42.5M CAD. With 65M shares out that is a current valuation of 1.2x Sales for a business all with the upside optionally of the EdTech platform Amphy for free.
TARGET PRICE – 5.0x Sales @ 3.25/share or close to 300% upside if they can get that multiple to expand (Once again, The Trade Desk 25x FY21 Sales)
3. Kidoz Inc. (KIDZ.V)
Revenue - $2.9M USD EST up 52% YoY (FY21 Q3 v FY19 Q3 Rev up 129%)
I am of the believe that this is the best platform asset in AdTech given their SDK adoption and approval with Google being GDPR and COPPA compliant with a direct targeting line to Kids and Teens. There is another interesting angle here with iOS 14 IFDA changes that just wreaked havoc in the industry with ground zero being Snap.
They benefit from these IFDA changes as they utilize a more contextual approach to advertising that doesn’t depend on these unique personal identifiers.
You can see it in the pre-released Monetizable Impression figure of 345M up 35% QoQ and up 80% over Q1. This will directly lead revenues even without assuming any pricing growth.
This should also be the first Q we get a look at their entry into China market with the TradPlus hook up that took place in July and with their Webinar coming up to talk directly about their China growth plan I don’t think the market is understanding how big the opportunity could be.
EBITDA – $200K USD EST
It has to be pointed out here that they expense all their platform R&D so all costs run through the income statement so on an apples-to-apples basis to peers it is understating EBITDA generation.
I have to be honest here, I hated the spending on IR that was included in Q2 given that all their growth is organic, have net cash on the balance sheet and are not reliant on outside capital to finance growth through acquisitions. It just made no sense to me.
The impressive thing here that all this growth has come with the ability to maintain their gross margin and the bullish part I think there is still upside to that figure. Like the previous two, they are in the process of rolling out a Programmatic offering as well which is much more scalable and will be associated with higher margins.
Looking Forward
This one is set up for the most explosive Q4 as management has stated many times in the past that up to 50-60% of annual revenues are accounted for in the Q4 period. Which can be understood given they have the attention of Kids/Teens on their platform which is so lucrative for advertisers into the Christmas selling season.
Management has already hinted at this in Q4, in their latest update stating that they literally have been adding people to scale up to answers sales calls they are seeing such strong demand into yearend. If that’s not bullish I don’t know what is.
Personally, I was hoping for a little quicker roll out of their Programmatic Self-Serve offering as there was such an opportunity into Q4 as that is what I am so bullish on for all of these AdTech names as the previous two were fully rolled out for that critical Q4 selling period.
Given it has pushed out closer to FY22 for full rollout I project out a 50% growth rate for FY22 that gets me to $17.5M USD in Revenue or $21.9M CAD. With 135M shares out that is a current valuation of 4.2x that is early in its growth phase pre-programmatic roll out.
TARGET PRICE – 8.0x Sales @ 1.30/share or close to 85% upside *there is a little more to the story here as they are earlier in their growth phase and the strategic value of the asset given the only other pure play in SuperAwesome got acquired by Unity in the last couple years for 8-10x Sales and since valuations have just continued to climb, Anyone look at Roblox lately….
In conclusion, these are three of the best opportunities in the market today. There is so much upside on a multiple basis given that all three have above industry growth rates at below industry valuations.
What do these three names have in common, they are all about to see an acceleration of both the growth rate and their margin profile given their launch of all in a variation of a Self-Serve Programmatic Offering and it is this adoption rate and associated margin expansion I think the market is missing.
When all three have net cash on the balance sheet and are EBITDA profitable these scalable tech platforms see the double whammy of revenue growth w margin expansion it is all blue sky potential.
My final point in which I find it a fascinating point that also brings these three together. They all have their roots in Tel Aviv, Isreal and come to Canada to list. Without a true investor base the stocks languishes for a year or so to find their footing and the stock promoters blow out the stock and even as growth inflects retail gets a chance to get in right as the business accelerates and a trough multiple creating great entry points right here.
Enjoy the Ride.
LONG