Post by
TallerCraig on Jun 24, 2022 1:59am
My ALL IN Bet on the CDN AdTech Sector – 4 Must Own Names…
Alright that’s it I am ALL IN. This is the single best set-up I have seen the market in a long time. I put my last investable dollar of capital in this week and now the space represents close to 50% of my total investable dollars spread across 4 names.
All of the names have been absolutely smoked due to fear of broader macro weakness but that is such short sighted as many of these names play in the niche space of digital programmatic Ad Spend which is the fastest growing sub sector of the entire ad space and all three of the growth names have growth rates faster than the underlying sector.
And even if you look back to the 2008-2009 the greatest financial recession in the last 100 years where total media ad spend declined 5.8% in 2008 and 17.5% in 2009 the Digital Ad market still grew through both those years at a mid-single digit clip. Secular Tailwinds are a powerful thing.
The next bear point I would like to de-bunk is the regulatory risk that these names are facing from ios14 targeting changes from Apple, Google cookie tracking changes and the broader regulatory overhand from COPPA and GDPR out of Europe. These headwinds for the industry are tailwinds for a number of these companies as they use alternative methods such contextual advertising to determine relevance, being GDPR & COPPA compliant already, have access to first party data and intent based search to work around these headwinds so publishers can use these offerings complementary to existing products to enhance relevance and deliver higher ROI.
The Google cookie removal has been talked about for many years and the implementation date has been pushed back over and over again. Why would they intentionally hurt their own business? They are currently working on alternating the attribution metrics within their network from search, gmail to YouTube that make it more of black box. Making these Ad Targeting measurement tools in Canadian AdTech even more relevant.
Lets Get into it;
I got 3 Hyper Growth Names & 1 Names that is just too cheap to Ignore;
Zoomd Technologies Ltd. – ZOMD.V
Valuation – <0.5x EV/Sales & 4x EBITDA w LTM Revenue Growth of 142% YoY w Updated Guidance of 50% Growth for 2022.
This is a perfect example of everything I am looking for. I will dig into the numbers in another post but at a high level we will look at a couple points.
1) Growth Uncorrelated to Macro Environment - they are addressing this on two fronts, they acquired another business to tuck into their platform early this year to further accelerate their client list and their shift to programmatic offering. Secondly, due to the global nature of their business they have already highlighted that the FIFA World cup later this year is going to be a major tailwind to their top and bottom line. No recession is going to stop the FIFA event.
2) Regulatory Tailwinds – They are GDPR compliant and there was a remark from their Q1 press release that is all you need to know “Apple's iOS14+ privacy changes helped drive new customers to Zoomd's platform and products” Think about ZOMD as the Google for publishers to monetize search intent. My favourite model in the entire space
3) Balance Sheet Strength – $5M USD (6.5M CAD) Cash on the balance sheet with positive net working capital of $3.6M USD (4.6M CAD) with no long-term debt.
4) Product Expansion – They are in the midst of their programmatic rollout shifting to more of a high margin offering with more of a SaaS style offering. You have seen it with the business in the last 12 months as they acquire these small businesses at great prices to enhance their offering to help drive these transitions and to build out a broader suite approach. They have reached the point of scale where every incremental dollar of revenue falls right down to profitability and they can tuck in these businesses and add scale and profitability.
If I could tell you could buy a secular grower with a 50%+ growth rate that is profitable trading for 0.5x Sales & 4x EBITDA you would think I was crazy. This is the single best risk/reward in the entire space from a very non promotional management team. I still think that guide is a sandbagged figure that the growth rate post Ablert AI acquisition is going to be much much higher this year especially seeing that Q1 FY22 growth was 140% YoY.
Note: at this point last year they were guided to a 30-40% growth rate for FY21 and ended up putting up Revenue growth in FY21 of 105% YoY…
What’s it worth – Given the growth rate I think FV would be around 10x EV/Gross Profit or 12x EBITDA on the business which would get me to 3.25/share on Gross Profit or 1.50/share on EBITDA. These names have been destroyed but the businesses are going to continue to grow through this macro
Kidoz Inc. – KIDZ.V
Valuation – 2.0x EV/Sales & 10x EBITDA w LTM Revenue Growth of 72% YoY w Updated Guidance of 60% Growth for 2022.
This one is the most defensible business model with the longest run ways for growth of the bunch hence should trade at a significant premium. Also, they expense all of their R&D costs so the EBITDA number is a real Cashflow number there is no slight of hand with capitalized costs.
1) Mobile Gaming Growth Red Hot – this is direct play on the two hottest space all bundled into one bet. The shift to mobile & gaming.
2) Regulatory Tailwinds – They are one of the few SDKs that targets directly to kids/teens and as a result they are COPPA and GDPR compliant. As well, since they use a contextual approach, they are not sensitive to the ad targeting changes that use more personal identifiable markers to target consumers
3) Balance Sheet Strength – $2M USD (2.6M CAD) Cash on the balance sheet with positive net working capital of $4.0M USD (5.2M CAD) with no long-term debt.
4) Product Expansion – This is another one that is in the shift to more of a programmatic offering, this one with so much upside as they are able to generate so many monetizable impressions through their SDK that they can feed through their ad inventory across the entire network in a low touch cost effective manner.
Here is another one, secular grower with a 50%+ growth rate that is profitable trading for a very strategic asset in the Ad stack trading at a heavy discount for what its worth. You don’t have to look any further than the Fortnite parent company acquisition of kid friendly ad engine Super Awesome for 8-10x Sales before valuations even went parabolic in September 2020.
What’s it worth – Given the growth rate I think FV would be around that take out price for Super Awesome which would be 1.50/share at the low end & 1.90/share at the high end.
Sabio Holdings Inc. – SBIO.V
Valuation – 2.0x EV/Sales & Cashflow Positive w Growth Rate accelerating to 116% YoY in Q1 w underlying divisions showing further growth of 294% YoY in Connected TV Division
This is a new one for me but it has been the most impressive business I have seen. Another one of these orphan stocks from the 2021 IPO calendar that was never able to build out a shareholder base or any interest once the market rolled over but, in the meantime, has put up the fastest growth in the entire space.
1) Growth Uncorrelated to Macro Environment – this one is in control of its own destiny the most, they are in the hottest area of AdTech with Connected TV and you have seen it is the growth rate more than tripling YoY. This is another one that took advantage of the discounted prices and tucked in another business line early in the calendar year that should add inorganic growth to get them through a couple softer Qs in the macro this summer.
2) The US Election Kicker – They are already touting their election ad solutions and you have seen it with one of their latest press releases. As well if you dig through the MD&A they are already seeing an election ad spending adding 20% to the top line in 1H of FY22 just from primary races. How high can that number go when things start to really fire up into the fall…
3) Balance Sheet Strength – $4M USD (5.2M CAD) Cash on the balance sheet with plenty of liquidity to fund growth
4) The Netflix Dream – I thought it was very telling this Spring when Netflix admitted paid subscription TV has reached a saturation point and that these OTT streamers will have to include an ad supported model as well. And what is the top bet for Connected TV offering in Canada AdTech. Yup you got it Sabio Holdings.
This will be the fastest growing name in the entire space all year no matter the macro environment. It is the name I have the most certainty that will grow revenues 100%+ this year and do so Cashflow positive with the backend just being massive into the election. The margin profile of the business is so impressive as well so each dollar of growth will fall rapidly down to profitability with gross margin profile in the 60% range relative to peers in the 30-50% range.
What’s it worth – I think given the growth rate and margin profile and how early they are into their growth phase you could push the Gross Profit multiple higher than 10x closer to 15 – 20x multiple. If I put a 10x multiple on a doubling of revenue in FY22 I get to 8.4/share or over 10.0/share if you push the multiple higher.
Adcore Inc. – ADCO.TO
Valuation – 0.1x EV/Sales & 4x EBITDA w $8.7M USD (11.3M CAD) Cash on the balance sheet
This is one of the cheapest companies I have ever seen in my life for a profitable tech business. Period full stop.
There is no need to give an overview you just got to look at the price.
Current Market Cap - $12.4M CAD v Cash $11.3M CAD
So you are paying $1M enterprise value for a company generating $30M in revenue with profitability that has finally found religion on gross profit margin.
You could not rebuild this business for that price or acquire their customer list for that. All this before they roll out their US market expansion plan and they just launched their marketing cloud offering into the market for 2022.
They have the backing of Tourism Israel on a large contract to continue to fund their growth in North America.
The stock got caught up in the Feb 2021 hype and they smartly raised a lot of capital at higher prices and they were smart enough to not burn a whole bunch of capital pursuing that foolish education software product.
What’s it worth – Let’s just say the business is FLAT this year. They will generate multiples of their Enterprise value in cash this year and could end the year TRADING FOR LESS THAN WORKING CAPITAL. How are you even supposed to value that…. Even if you get it back to a 1x Sales & 8x EBITDA figure it could be worth over 1.00/share when you back out the cash.
In Conclusion
These names are some of the fastest growers out their all with net cash on their balance sheet, profitable with growth above the sector growth rate that will grow throughout the entire year.
You are paying trough multiples for businesses for increasing and in some cases accelerating growth!!!
I would not be surprised if some of these names could go up 3-5x just on sentiment shift alone.
This is my fat pitch. When you see it, you have to swing!!!
MASSIVELY LONG ALL OF THOSE