illumin Holdings Inc T.ILLM

Part 4

[Torontojay]

My Projections: I’m looking at a 2yr business case…

Let’s start with the base case for 2022. Remember Acuity’s market cap, minus cash, is sitting at $170 million.

Let’s start with all legacy clients being moved onto the Illumin platform with current spend. That’s approximately a $115 million base revenue case. Illumin grew 42% in Q3; if we extrapolate over the entire 2022 based case, we can add another $48 million, or $163 million in total revenue. With a mix of 3 or 4 Tier 1 clients and moderate spending increases from current clients as macro conditions improve, this seems like a more than reasonable expectation, with ample room for a beat. Another 42% in 2023 would add an additional $68 million, or $231 million in total revenue. I think both these numbers are reasonable and conservative.

Worst case:

They spend the $100 million in cash to achieve the above growth numbers and they continue trading like a value stock at 1.5x P/S due to questions of growth sustainability. Based on 2023 revenue of $231 million, they would have a market cap of approximately $346 million. That’s a 28% increase from today’s prices, roughly $5.50/share, a disappointment for a growth stock, but a average 2 year return for most investors.

Best (reasonable) case:

Let’s suppose they make 2 strategic acquisitions for $50 million total and keep $50 million cash on the books. Those acquisitions fuel Illumin growth to not only land the top Tier one clients, but also lay a path to start seeing true small advertiser self serve come to fruition. We’re still in the early stages, but the path is clear. We only see modest improvement from the base case of $231 million, to say $250 million in 2023. But they’ve proven sustainable 40%+ growth with a path to a huge untapped TAM. Their P/S rerates in line with Magnite at 10, and their market cap is now $2.5 billion. That’s a 925% increase from todays price, roughly $40/share.

Can they do worse than the base case, yes. If they completely fail at execution, it’s possible.

Can they beat the best case, yes. If they just land the 8 Tier 1 auto manufacturers in their pipeline ($80M rev), & get a similar +300% increase in existing customer spend that they’ve already seen, they could blow away the best case scenario.

Realistically, I expect to fall somewhere between the two.

Final Take

First I want to thank Justin B. @JustinB90072145 for engaging on Twitter & in DMs to help flesh out my take here. Some of these takes are pulled from our conversation. Healthy debate and discussion truly is a powerful tool that more people should take advantage of. I digress…

Management:

Tal is a little unrefined, and the interim CFO is an unknown, BUT… Acuity was left for dead during the 2020 pandemic. Go back and look at revenue and sales, they traded down to $0.52/share, they could have easily folded up shop. But they rallied the troops, scrambled to get new clients, maintained margin, and survived. And it truly was impressive. I love this thought from Justin, “Tal doesn’t like getting punched in the mouth about his company…and that just happened.” I predict they come out swinging in 2022.

Balance sheet:

There is no dispute that their balance sheet is solid. And as Justin pointed out to me, they have the scars and experience of 2020 behind them. Love this quote from Justin, “..there are "spec” tech companies trading way higher on hopes & dreams vs. revenue and margins. I’ll take revenue and margins..“

I recently re-watched this video of Lynch after @gannonbreslin linked it in his last newsletter, and I highly recommend taking 45 minutes to give the full speech a listen:

Peter Lynch: 75 Years of Wisdom

One piece of this speech really hit home when thinking about Aquity (between 13 minute - 16 minute mark). He tells a great story, but paraphrased: "A company with no debt has a hard time going bankrupt”. Aquity is cash flow positive with $100 million in the bank, they are in no immediate danger of going bankrupt, thus the downside here is limited in my opinion.

Expectations:

I fully expect the 4th Q to be under whelming. But I’ll be looking for signs that the thesis is playing out. Did they do any M&A? Did they land any Tier 1 clients? Has Illumin growth continued at a 40%+ growth rate? Is Total revenue growing, or staying flat while Illumin continues to grow? Are current clients continuing to increase spend? Did that mystery Shopify deal come to fruition?

At this point, I don’t need them to knock it out of the park in 4Q21, I need to see definitive progress towards my 2022 outlook. I think 2022 will be the make or break turning point for Aquity, and their Illumin platform.

I’m going to give them room to operate and keep accumulating when I feel the opportunity is right. My 2023 price range is anywhere from $5.50 to $40.00; one would be a massive disappointment, but not a portfolio killer; the other could be life changing. Market conditions, execution, and time will ultimately decide.

Without disclosing the service, a popular analyst just reiterated them as a buy and sent out this quote to their members: “…will certainly not be selling any time soon and will need a few more quarters of management credibility hits before we’d consider doing so; in truth, we’re probably closer to buying more than calling for a sell.”

Summary

I think Aquity, and Ad Tech in general, probably has another quarter to prove they can get going in the right direction. I honestly don’t expect a big 4Q21, and will look to play options on swings and accumulate shares where I see opportunity across my Ad Tech positions.

This is not a pump of Acuity by any means. You have to believe in the vision and be willing to hold for at least a couple of years. That’s where I currently am, and I added to my position last week. $ATY is currently a 1% position, and I am considering adding more. I will be monitoring closely for any signs of a broken thesis. And, I look forward to hearing your take on Acuity.