AcuityAds Holdings Inc
Shining a Light on the Consumer Journey with illumin; Initiating at Sector Perform
Our view: We initiate coverage of AcuityAds with a Sector Perform rating and $6 price target. We see value in the stock at current levels but are looking for more timely entry points. Potential catalysts include incremental visibility around the growth trajectory for illumin, the impact of potential new privacy controls for the ad tech industry, and the easing of COVID-19 and supply chain disruptions on digital advertising. Timing-wise, we look for such visibility to begin to emerge in the back half of 2022.
Key points:
• A growth strategy anchored around illumin. AcuityAds is a Toronto- based ad tech company. In October 2020, the company launched “illumin”, providing advertisers with the ability to plan, buy, optimize and report on omnichannel advertising programs from a single user- interface. With advertisers able to map out the consumer journey across devices and communication channels in real time using programmatic technology, management expects illumin to be the primary growth engine for the company. As of Q3/21, illumin generated $7.4MM in revenue, up +42% QoQ and accounting for 27% of the company's total gross revenue.
• See value in the stock but looking for more timely entry points. AcuityAds has not been immune to industry headwinds that have included concerns around the potential impacts of evolving privacy controls, a choppy digital ad market, competitive intensity and rising bond yields. While at 2.0x FTM EV/net revenue (versus an average of 3.8x for peers) we believe the stock is more fully pricing in these headwinds, we do expect the stock to be somewhat range bound pending incremental visibility around the growth trajectory for illumin, the impact of new privacy controls and the easing of COVID-19 and supply chain disruptions. Timing-wise, we look for such visibility to begin to emerge in the back half of 2022.
• Justification of price target and rating. Our price target and rating balance the potential for significant upside in the shares longer-term with near-term risks and headwinds. Our price target of $6 is based on the average of an EV/net revenue valuation applying a target multiple of 3.25x and a DCF valuation incorporating a WACC of 10.0% and a terminal EV/EBITDA multiple of 8.0x. Our valuation metrics weigh the potential growth prospects of illumin, healthy FCF conversion (60%) and a strong balance sheet (net cash of $102MM) with the above-average volatility of ad tech stocks, a still choppy digital ad market, limited visibility on the illumin growth trajectory and evolving privacy controls. While the implied return to our price target represents not insignificant upside potential, our Sector Perform rating takes into consideration: (i) relative implied upside versus our Outperform-rated small cap stocks within our broader media coverage; (ii) the higher volatility of the ad tech sector; and (iii) the timing of potential catalysts.