PSB Monthly Issue April 2015
Invest In The Next Big Thing In Digital Advertising
Advertising has always been a vital aspect of selling a product or service. There’s a crazy amount of money spent worldwide on ad campaigns each and every year.
And it’s no wonder… ads are often one of the primary methods of gaining new customers.
However, the world of advertising has changed.
For one, due to the Internet, a company’s target market can now be global in nature. What’s more, advertising online is very different that traditional advertising used to be.
Traditional methods of advertising such as TV, radio, direct mailings, and newspaper ads are still being used of course. However, their effectiveness is waning as more and more people do their shopping and find entertainment online.
Of the $537 billion expected to be spent on advertising in 2015, a whopping $149 billion is projected to be on digital ads.
That includes search (like ads on Google), display (banner ads), video, and social (like on Facebook or Twitter). Obviously, it’s a huge market.
More importantly, it’s a rapidly growing market. As such, there’s still plenty of room for smaller players to make a splash and capture market share.
One promising digital ad company is Marin Software (NYSE: MRIN).
The Digital Advertising Business
MRIN develops cloud-based digital advertising software. The company’s product allows marketing professionals to manage their digital advertising across search, display, social, and mobile advertising channels.
The main goal of MRIN’s software is to optimize and improve advertising campaigns. This is done through identifying opportunities, analyzing trends, comparing cross-channel performance, automating ad buying, and more.
Typically, MRIN’s primary revenue has come from search ads. That’s about 50% of digital ad spending overall – but there’s also the most competition in the space. As such, the company is expanding its focus to display and social ad markets. MRIN is already set up to optimize ad spending, so expanding into new territories makes perfect sense.
What’s more, the company’s software is cloud-based. So, it doesn’t really add supply chain costs to shift into new markets and regions. And, as I mentioned earlier, digital ad spending is huge and growing.
Marin already services 36% of Fortune 100 companies. That’s not bad, but there’s still room to grow. Plus, 34% of the company’s revenues come from international sources. Again, that’s good, but there’s ample space for growth.
The Numbers
MRIN’s financials are pretty solid across the board. The company generated $100 million in revenues last year, a 29% increase from the prior year. More impressively, gross margins were at 67%.
The company revenue retention is sitting at a solid 97%. With 818 active clients, that’s definitely a solid retention rate. While MRIN isn’t profitable, management does expect adjusted EBITDA to break even at the end of this year.
Meanwhile, the balance sheet is in great shape.
Marin holds $68 million in cash compared to very little in the way of debt. It works out to a robust current ratio of 4.5x. That sort of ratio is bound to make the company an attractive buyout candidate.
Investment Risks
As with any small cap investment, MRIN does have a few risks.
A slowdown in the overall economy could lessen the amount businesses spend on advertising.
Additional competition in the space could make it harder for the company to grow revenues.
Finally, changes in technology could alter the strategic direction of the company and increase costs.
Potential Return of 91% or More
MRIN is a leader in digital ad software, but with plenty of room for growth. The industry is growing like crazy, so first movers like Marin have an advantage. Plus, the company has an excellent balance sheet.
Yet, the shares are trading at just 2x revenues.
The ad tech industry currently trades at around 4x revenues overall. Since most ad tech companies are relatively new, they don’t tend to be profitable. As such, price to revenues is a reasonable metric to use for MRIN’s valuation – and it clearly shows the stock is undervalued.
Based on our analysis, we see MRIN climbing to $12.00 a share or more. Buy the shares now for potential gains of 91% or more!
KEY INVESTMENT DATA |
| Name: Marin Software
Ticker Symbol: MRIN Market Cap: $223 million Recent Price: $6.29 PSB Rating System 4.6 Stars Raging Revenue: (4.5 stars) The company has 29% year over year growth on a annual basis. More importantly, the industry is growing like crazy and should offer plenty of upside. Beautiful Books: (4.9 stars) MRIN has over $68 million in cash compared to just $3 million in debt. The company has a strong current ratio of 4.5x. Stellar Structure: (4.7 stars) The company’s insider ownership is at 31%. In addition, institutions own another 45%. Overall, it looks like the smart money is heavily invested in MRIN. Valuation Verification: (4.5 stars) MRIN is trading at just 2x revenues, about half the industry average. Given the valuation, the shares could climb 91% or more. Meaningful Milestones: (4.4 stars) MRIN is shifting its focus this year to display and social advertising which should help give a boost to revenues. The company also expects to break even on an adjusted EBITDA basis later in the year. |
Action Recommendation
BUY Marin Software (NYSE: MRIN) up to $6.90 per share.
Recent price is $6.29
Use a stop-loss of $4.50 on this position.
Don’t forget your position sizing and stop-loss rules.
Position Updates
Here are some highlights from the past couple weeks…
- USA Technologies (USAT) and Carriage Services (CSV) both reached new highs since our last update.
- Nevsun Resources (NSU) issued a $0.04 dividend on March 27th, effectively lowering our buy price to $3.14.
- We’re moving Profire Energy (PFIE) from Buy to Hold.
Category: PSB Monthly Issues
