Netflix came in strong with the recent earnings and there is no reason to expect Roku will not also come in strong especially as Covid and stay-at-home orders have accelerated the shift towards Connected TV.
It's easy to compare Roku's roughly 50 million users to Netflix's 200 million and to assume Roku is a much smaller company or lagging the subscription behemoths, such as Disney Plus. This is a mistake as the ad-based video-on-demand (AVOD) market is a newer market than subscription-video on demand (SVOD). The AVOD market is distinguished from SVOD because it's primary driver is pay-TV ad dollars rather than the cord-cutting trend or subscribers.
About $10 billion is spent on Connected TV ads compared to $70 billion on pay television ads in the United States alone. Pay-TV ad spend is now expected to decline by 15% to $60 billion this year due to the postponement of live sports and also due to an increase in cord-cutting from covid.
Here's something to consider – cord-cutters aren't going back to cable, and this places Pay TV ad budgets in a dilemma. These budgets have not cared much for mobile or desktop. Despite the sheer number of data scientists and (frightening) level of behavioral targeting used by Google and Facebook, Pay TV has held on to an impressive level of ad spend at about $70 billion in 2019 compared to $87 billion on mobile. One reason is that advertising on the television is more effective – no amount of data collection can change the video completion rate achieved when you're sitting in your living room.
Although these budgets have not migrated to mobile or desktop in the past, those advertisers now have an opportunity to use data to personalize the advertising while viewers are in their living rooms. Roku and AVOD are the best of both worlds – combining data for targeting and high completion and viewability rates — and this creates a unique market from SVOD. For reference, completion rates on Connected TV ads are as high as 97% with 100% viewability, according to a study by Benchmark.
Below, I review Netflix's earnings as it's essential to keep an eye on exactly how long a winner can run in the OTT media category. I also review Roku's upcoming earnings and what to look for.
Review of Netflix Earnings:
Netflix surpassed expectations again in Q4 despite many believing the increase in Disney Plus subscribers and HBO Max would weigh on Netflix's subscriber results.
To be fair, the real test is yet to come as dining out, travel, and return-to-work patterns begin to normalize. Netflix is guiding conservatively for Q1 with 6 million net additions.
Revenue grew 21% YoY to $6.6B, topping consensus estimates by $20M. Net adds of 8.5M came in well ahead of expectations calling for 6M. Netflix now expects 2021 free-cash-flow to be “around break-even” versus previous guidance of -$1B. The company also intends to explore a share repurchase program moving forward:
“Combined with our $8.2B cash balance and our $750M undrawn credit facility, we believe we no longer have a need to raise external financing for our day-to-day operations…As we generate excess cash, we intend to maintain $10B-15B in gross debt and will explore returning cash to shareholders through ongoing stock buybacks, as we did in the past (2007-2011)."
Competition has been one of Wall Street's primary concerns regarding Netflix. In Q4, Netflix maintained a healthy lead over the competition with 29% market share. In Q4 2019, Netflix had 31% share of the streaming market. Keep in mind, the market is growing overall so a smaller percentage can still represent subscriber and revenue growth.
NIELSEN, CREDIT SUISSE
Despite the modest decline in the share of minutes watched, it is evident that competition did not bite into Netflix’s net adds in 2020.
Source: Netflix Shareholder Letter
This supports the thesis that other streaming services, namely Disney+, are complementary to Netflix. Netflix just completed its best year in history while Disney+ and other new streaming services became available. Consumer behavior is showing that consumers prefer to have multiple subscription services.
In Q4, Netflix had 57.2M global app downloads versus 53.5M for Disney+. In Q4 '18 and '19, Netflix had 53M and 58M global app downloads, respectively. These numbers indicate that the success of Disney+ is not coming at the expense of Netflix. Instead, Disney+ is a complimentary service helping to further the acceleration of streaming to the TV.
Streaming to the TV gained significant market share versus all other TV usage during the pandemic.
NIELSEN
Streaming to the TV now owns over a 20% share of the market. The increased demand for streaming during lockdowns represents the acceleration of a trend that was already in progress.
Although I do not own Netflix stock, I track the company closely as I’m invested in other opportunities in this space. I’ve remained bullish on this stock when others doubted its position as new competitors came on the market.
I have also written extensively about why Roku is one of the best ways to play AVOD market growth. Our first entry in ROKU came in the $30 range in 2018, and we remain bullish on the name moving forward. You can read my first article covering Roku in 2018 here.
An investment in Roku does not force investors to choose which streaming service will be #1, as Roku benefits from the success of a broad range of AVOD publishers. Advertisers are planning out strategies to reach cord-cutters effectively, and Roku stands to be a main beneficiary. Roku is positioned to capitalize on AVOD market growth and has now launched an omnichannel marketing platform to extend first-party data for mobile and desktop targeting. This last part is key because Roku can now capitalize not only the $10 billion currently spent on CTV ads and the soon-to-migrate $70 billion from Pay TV – but Roku will offer additional targeting on mobile and desktop with first-party data – opening up the entire $200 billion+ ad market.
For Q3, Roku reported 73% year-over-year revenue to $452 million. Platform revenue increased 78% YoY, and gross profit was up 81% YoY.
In the past, investors have been critical of Roku for dipping sub-60% on margins. I defended the company, stating margins are rarely an issue for an ad-tech company. Roku added 2.9 million incremental accounts with average revenue per user (ARPU) up 20% to $27.00.
Roku is guiding low for a quarter when most people were stuck at home. In general, this management guides low, stays focused, and is out of the limelight. Q4 guidance is for revenue growth in the mid-40% range with a breakdown of platform revenue at 2/3. My guess is Roku will handsomely beat this guidance.
In December, AT&T announced that customers could watch HBO Max on Roku. Part of our early analysis on Roku pointed towards agnosticism working in Roku's favor and the strength of the operating system and number of channels. This was a timely boon as HBO Max had become the fastest-growing major streaming service recently per data from Apptopia with 1984 Wonder Woman being released on Christmas Day.
Over a year later, my statement on why no streaming company will be able to dethrone Netflix in October of 2019 remains true. Disney Plus and HBO Max are great services, as well, but they are not mutually exclusive.
Regarding Roku, we believe first-party data for connected TV ads is a significant trend moving into 2021 and an important distinction from subscription-video on demand (SVOD). Therefore, the main takeaway is that AVOD has an approximate ten-year runway as the trend began taking shape when Roku launched its ad platform in late 2018/early 2019. There were AVOD players in the space before this, but the budgets were negligible. Therefore, the cord-cutting trend is secondary for Roku, whereas Pay TV ad budgets' migration is the primary trend.
There are other reasons that I like Roku, such as owning the whole stack including the operating system, the management, it’s global opportunity, the agnosticism, etcetera– which I have covered in previous analysis. However, I try to keep things simple when discussing my thesis, and the migration of Pay TV ad budgets combined with Roku’s first-party data is why this stock has its best years ahead.
This article was originally published on Forbes on Nov 12, 2020,09:01pm ESTForbes on Nov 12, 2020,09:01pm EST
Roku
Roku reported Q3 earnings on November 5th. The 73% year-over-year revenue growth the company announced was 23% above consensus expectations. Gross profit rose 81% YoY while gross margin rose 216 basis points in total to 47.6%.
Roku added 2.9M active accounts in the quarter (+43% YoY). Total streaming hours increased by 0.2 billion hours over the last quarter to 14.8B (+54% YoY), while ARPU grew 20% YoY to $27.
Roku was a beneficiary of the rebound in ad spend, as the company saw Q3 monetized video ad impressions grow 90% YoY vs. 50% YoY growth last quarter. Roku is anticipating that Q4 revenue growth will likely be in the mid-40% range, similar to the growth rate seen in the last few holiday seasons. Per the earnings call, the company is being cautious about holiday spending with this forecasted guidance.
ROKU shares briefly hit all-time highs immediately following the announcement of these results.
Brands like DraftKings are shifting budgets especially as TV sports have been canceled and delayed. Roku also pointed towards CPG brands as a large driver for ad revenue in the current quarter.
We have got brands like DraftKings, for example, who is a big sports spender, had to shift budgets out of TV as sports were canceled and delayed. Has moved a significant portion of their budget into OTT.
In the earnings call, management felt confident the migration from linear TV would be a long-lasting trend after COVID.
We are not going back to the way it was to be clear. I mean, I think, COVID did — COVID triggered a lasting durable change in how CMOs and marketers are thinking about their TV ad spend. In Q3, we saw a 17% drop in linear viewing, Roku was up 54%, 92% of Roku cord-cutters are very satisfied with their decision to cut the cord and aren't planning to go back.
So I really think this is a one-way transfer function. We don’t go back to the older spending patterns, because the audience isn’t there, marketers need to follow the audience into OTT. And they stay, they stay because of the enhanced capabilities.
Roku also tackled the question of Wal-Mart and Comcast partnering. The CEO reiterated that Roku is the #1 TV operating system and software operating system in the United States and now Canada with a world-class team of software engineers. He also emphasized that Walmart is a large partner with Roku and has carried many Roku OEMs:
In terms of Walmart, I will just say a few words. I mean, Walmart is a big retailer, a very strong partner of Roku’s. We have a great relationship with them. They sell millions of Roku players a year. They sell millions of Roku TVs for various Roku OEMs, including TCL, Hisense, RCA, Philips, JVC.
We build — we help them build on branded, which is their house brand, Roku TVs, smart TVs, and that’s a business that’s been growing extremely well for them. So, it’s a great partnership and it’s a long-standing partnership, and we have put a lot of work into making sure that it stays strong.
Square
Square announced blowout Q3 results with huge beats on both the top and bottom lines. Non-GAAP EPS of $0.34 beat consensus expectations by $0.18. The company saw revenue grow 140% YoY to $3.03B, beating the consensus estimate by $950M or 46%.
Gross payment volume of $31.7B was 6% above expectations. In total, Square saw gross profit rise 59% YoY, while Cash App gross profit soared 212% YoY.
In the quarter, the number of average daily transacting Cash App customers nearly doubled from the same period last year. Square did not provide guidance for Q4, but noted in its shareholder letter that the trends they observed in Q3 remained strong through October.
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Square’s Seller Ecosystem revenue grew 5% YoY as regions began to reopen. More impressive was the growth of Square’s Cash App Ecosystem, which saw an increase of 23% in daily active users and 574% YoY growth in revenue.
Bitcoin revenue for Square grew 11x last year’s total, but even excluding Bitcoin transactions, Square grew Cash App revenue 174% YoY this quarter. This is an acceleration from the 140% Cash App growth (excluding bitcoin revenue) Square recorded last quarter, and 98% growth previous to that.
Square is focused on expanding Cash App’s utility beyond peer-to-peer payments, CEO Jack Dorsey remarked in the company’s shareholder letter: “We remain focused on increasing daily utility for our Cash App customers to products beyond peer-to-peer payments, which helps drive higher engagement and monetization.”
Square’s investments into increasing Cash App engagement continue to pay off as the company’s Cash App Ecosystem displayed an acceleration in growth across the board this quarter.
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Jack Dorsey noted that Square is positioned to benefit in both segments moving forward:
“We continue to believe that our Seller and Cash App ecosystems are well-positioned to benefit from the acceleration of secular shifts, such as omnichannel commerce, contactless payments, and digital wallets for consumers.”
The company did not give Q4 guidance due to uncertainties yet did discuss what they have seen so far through Q4. Square's Seller Ecosystem saw a modest acceleration from Q3 in October:
“Seller GPV was up 8% year over year, which improved modestly compared to year-over-year results in the third quarter.”
Cash App has seen a modest decrease in transaction volume in October, which management attributes to the end of government stimulus programs and unemployment benefits:
“Gross profit growth in October moderated compared to the third quarter, driven by a decrease in transaction volume per active customer. We believe this was partly a result of the end of government stimulus programs and unemployment benefits at the end of July, as stored funds in Cash App have decreased since July.”.
The Trade Desk
The Trade Desk announced Q3 results that easily cleared analysts’ expectations. Revenue grew 32% YoY, beating consensus estimates by 19%. Non-GAAP EPS of $1.27 was a big beat on the consensus bottom-line expectation of $0.45. The company noted that it saw Connected TV grow over 100%, Mobile video spend grow 70% and Audio spend grow 70%.
Management issued an upbeat outlook for Q4, expecting $289M in revenue at the midpoint vs. expectations of $255.1M. At the midpoint of this estimate, The Trade Desk is expecting roughly 34% YoY revenue growth in Q4. TTD shares traded over $700 for the first time immediately following the announcement of these results.
Most impressive from TTD’s report was exceeding 100% YoY growth in their Connected TV segment. CEO Jeff Green remarked in the company’s press release that COVID has accelerated advertising innovation across the board:
"So far in 2020, we've seen several years of advertising disruption and innovation compressed into a few months. As a result, advertisers have become more deliberate and data-driven with every advertising dollar."
In the Q3 earnings call, Green talked more about how companies are adapting data-driven measurement strategies for justifying marketing budgets:
“We recently surveyed more than 200 top advertisers, around 85% of them said they are under new pressure from CFOs to justify marketing spend and to measure against business goals.”
Despite The Trade Desk’s beat, the company did not report the numbers that Snap or Pinterest did (32% growth versus 50-60% growth). TTD’s stock is trading at a valuation that has been historically very hard to sustain in ad-tech.
Rarely, does ad-tech trade over 20 forward price-to-sales even during high-growth periods. Not only is The Trade Desk well exceeding the mean but is trading roughly 200% higher than peers even though Roku, Pinterest and Snap had a better current quarter and are forecasting stronger forward guidance.
The Trade Desk stock trading 2x more expensive than ad-tech peers that reported much higher revenue growth. – YCHARTS
TTD’s forward PE Ratios (not pictured) is also outsized at 168 compared to Facebook’s 30 forward PE Ratio. Facebook’s PE Ratio has never exceeded 119 even during its high-growth quarters of 100%+ growth and/or with low EPS (law of large numbers).
Facebook’s current P/S has also never exceeded 20 even during its high-growth quarters.
This is despite The Trade Desk facing headwinds with Apple’s changes to IDFA. Apple extended the iOS update from September to an undetermined time “early next year.”
On September 3rd, Apple delays IDFA changes until early next year – @BETH_KINDIG
Although the risks are hard to quantify right now, most advertising experts are in agreement this will affect the entire mobile ad industry on iOS. Facebook has stated they would shut down Audience Network as most ad exchanges need some kind of identifier for targeting and attribution. Here is a great write-up from mobile analyst Eric Seufert on how this could affect ad prices.
The Trade Desk has stated only 10% of its inventory uses the IDFA but has made no clarifications on how it will run mobile attribution and measurement without an identifier, whether that’s Apple’s or their own. There are efforts from a collective federation of ad companies to use encrypted emails, although there is no guarantee would Apple would allow this on iOS and Safari even if the ad industry agrees to pursue this method. ATS requires users to authenticate which is another unproven factor in the work flow.
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Overall, the risk is an unknown and we will get real answers it looks like “early next year.” For The Trade Desk, it’s a risk investors need to be aware of. Notably, publisher segments can help augment targeting but this will come from the supply-side.
Datadog announced strong Q3 results and an upside outlook that cleared analyst expectations. The company grew revenue 61% YoY to $155M, representing a 7% beat above consensus estimates.
The company grew customer count by 38% in the quarter versus consensus expectations of 32% and added 92 new customers with over $100K ARR (+52% YoY), slightly above the consensus estimate of 90.
Datadog
In Q3, Datadog recorded its 13th consecutive quarter with a dollar-based net retention rate exceeding 130%. Operating margin improved to 9% in the quarter versus expectations of 0.6%, while gross margin improved 3% to 79%.
Q4 guidance was issued for $163M in revenue at the midpoint (+43% YoY) which was 5% above the consensus outlook. Datadog shares initially sold off as much as 14% on these results, but the stock pared its losses to close trade on Wednesday. The stock rebounded Thursday and is now up over 11% off Wednesday’s lows.
In its Q3 earnings call, Datadog’s CEO Olivier Pomel commented on the recovery in usage trends the company observed after a weak Q2. “Throughout the quarter, usage growth of existing customers was robust which was a return to more normalized levels after slower usage expansion in Q2…the pace of usage growth in Q3 was broadly in line with pre-COVID historical levels.”
After a period of cloud spend conservation among Datadog’s enterprise customers in Q2, the company added a record amount of ARR in the quarter. The company managed to do so profitably, as operating income, cash flow and FCF all came in above expectations.
Notably, Datadog’s CAC payback period decreased to ~12 months from ~18 months sequentially despite adding over 400 more customers in Q3 versus Q2.
The ~12 month payback period recorded in Q3 is more in line with pre-COVID levels, as last quarter is looking more like an outlier given the aforementioned headwinds the company faced in Q2.
Datadog’s platform has proven to be easily adaptable and sticky for enterprise customers migrating to the cloud, as evidenced by the increasing number of existing customers using more Datadog products. CEO Olivier Pomel remarked on this in the company’s earnings call when he said: “our platform strategy continues to resonate and win in the market. As of the end of Q3, 71% of customers are using two or more products, which is up from 50% last year. Approximately 20% of customers are using four or more products which is up from only 7% a year ago.”
CEO Olivier Pomel also commented on the partnerships Datadog announced in Q3 with Microsoft Azure and Google Cloud Platform, noting that the flow of revenue from these partnerships will not be immediate: “there's not going to be an immediate impact, but we see that as being potentially meaningful contribution in the mid to long-term.”
The partnerships with Microsoft Azure and Google Cloud Platform that Datadog announced in the quarter, along with the existing alliance with Amazon Web Services, validates the company’s leadership in cloud-native-observability and establishes its collaborative relationship with the world’s top public hyperscalers. Over the long term, Datadog expects that these partnerships will become meaningful sources of revenue growth.
Looking ahead to Q4, Datadog is confident the rebound in usage trends the company observed in Q3 will continue. CFO, David Obstler alluded to this expectation in the conference call: “Throughout the quarter, we saw usage growth that was more in line with pre-pandemic historical levels. The trend was broad-based and sustained throughout the quarter. This provides us with confidence that what we experienced in Q2 was a transitory optimization effort that were related to the challenging macro environment.”
With the normalization of customer usage trends and secular tailwinds related to digital transformation and cloud migration, management continues to believe that Datadog is very well positioned to capture a “large and growing long-term market opportunity.”
JFrog
JFrog announced earnings for Q3 in its first quarter as a public company. The company grew revenue 40% YoY, beating consensus expectations by 3%. JFrog also announced Non-GAAP EPS of $0.05, beating expectations by 5 cents.
Gross margins came in at an impressive 83% while FCF margin improved to 25% in Q3. For Q4, JFrog expects $41.4M in revenue at the midpoint vs. consensus of $40.52M. The stock has initially sold off up to 10% on the results, as the 40% revenue growth represents a deceleration from the 46% growth recorded last quarter. Even after today's sell-off, FROG still trades at approximately 30x 2021 revenue, which remains among the highest valuations in the software industry.
Here is what the Analysts ratings for the recent string of IPOs and where JFrog ranks:
Here is what the Analysts ratings for the recent string of IPOs and where JFrog ranks – BETH.TECHNOLOGY
When factoring in how fast some software names are growing, we see that JFrog still remains relatively expensive. With the deceleration, it’s likely we see an adjustment to JFrog’s valuation over the next quarter.
Growth Adjusted EV/2021 Revenue – BETH.TECHNOLOGY
We will be covering earnings again next week so consider giving us a follow.
Disclosure: Beth Kindig owns shares of Roku and Datadog, may purchase shares of Square in the near future and and she has owned shares of The Trade Desk and may again in the future. The information contained herein is not financial advice.
This article was originally published on Forbes on Apr 30, 2020,01:41am EDTForbes on Apr 30, 2020,01:41am EDT
Roku has gained up to 600% in less than 3 years since its IPO despite having many objectors along the way. In light of these sizable gains, Roku has seen five significant drawdowns ranging between 41% to 67%. Therefore, when considering if Roku will go boom or bust this year, I believe it will do both.
When I first began bullish coverage on Roku at $30, the company had a misunderstood business model. At the time I pointed out that Roku was an ad platform first and a hardware player second. At the time, the market was backwards-looking as Roku’s device sales made up 59% of total revenue in the six months leading up to its public offering.
Through 2019, its device sales made up only 34% of its revenue, while the remaining majority came from its platform. What investors initially failed to realize was that the hardware player was a means to its high-yielding ad platform. Roku has an added advantage from the data it has on consumers due to owning the hardware and the many content apps that need access to an OTT device.
With this history, my guess is investors will get Roku’s story wrong again this year as Roku must chose between its top line and bottom line. Covid-19 offers an important opportunity for Roku as OTT usage is skyrocketing and the company must expand globally for long-term growth. (I’ve covered extensively why the domestic market is no longer pertinent in my Netflix coverage).
Often times, growth and earnings are at odds with one another as revenue requires sales and marketing (or other investments), which ultimately eat at the bottom line. Or, in Netflix’s case, revenue growth and free cash flow are at odds. Conceptually, most investors know there is a cost to hyper growth, but in practice, it’s hard to see one of your portfolio companies miss those magical analyst estimates.
Despite monetizing through ads rather than subscriptions, Roku’s best role model for becoming a global media company is Netflix. What Netflix has done beautifully is ignore the pressures that comes with being a public company in favor of being a hyper growth company. This included taking on debt and other risks to gain ground. While I’m not suggesting Roku should take on the debt levels that Netflix has, it wouldn’t hurt for Roku to do whatever it takes to solidify itself as the leading global AVOD channel and ad platform this year.
International Expansion
Roku predicts that by 2024 roughly half of all U.S. TV households will have cut the cord or never had traditional pay TV.
Earlier this year, Roku began its expansion into emerging markets by entering Brazil. Strategically, Roku has partnered with the electronics company AOC to launch AOC Roku TV. The AOC TV/Roku platform will feature popular local content from Globoplay. With over 5,000 channels and over 1,000 free channels, Roku should do well in emerging markets. (I’ve also covered this in detail in a previous analysis.)
Furthermore, Roku has announced fifteen TV brands that come integrated with the Roku platform models. These models are available not only in the U.S., but also in the UK, Canada, and Mexico as of 2020. This kind of strategic partnership with TV models will help the company scale globally, which is a critical next step for Roku.
Pandemic Outlook
Roku recently stated that its commission revenue is expected to jump as viewing hours have increased due to COVID-19. However, it will still feel the shock of ad demand drying up.
Oppenheimer analyst Jason Helfstein cut the price target from $165 to $110. He forecasts Q2 ad platform growth to be around 18% YoY from the previous estimate of 62% growth. With that said, AVOD views are expected to grow 50% and streaming hours increase by 22%.
Needham forecast one or two more quarters of ad weakness, with ad growth uncertain in 2021. Analyst Laura Martin, who has a strong track record on this stock, said Roku may be able to withstand the storm with its unique model. “A key thing that differentiates Roku in this environment is that it doesn't set its ad-prices at auction,” Martin said in a Tuesday note. “It uses a direct sales force to set negotiated prices, just like traditional linear-TV. We believe that, even though ad-demand has been falling, Roku is still charging $30 + CPMs, and instead, is cutting the number of ads it runs per hour.”
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Any weakness in Roku’s price will likely be temporary, considering its financials and positioning. Although you could argue this is the case for many advertising companies, connected TV ads are in a growth trend while mobile is reaching saturation.
Unlike many ad-tech peers, Roku is well diversified. According to emarketer, Roku collects $1 million for letting a service like Disney+ take over the Roku home screen. Other companies like Netflix pay $1 for every Roku sold with a Netflix quick-launch button on them.
For every new market Roku expands into and every unit sold, these numbers will only increase with Roku’s brand and helps diversify the company from varying levels of ad demand.
Recent Financials
The company released a preview of Q1 results on April 13, 2020 and reported revenue in the range of $307 to $317 million. This suggests growth of 51% YoY.
For Roku, it matches the same growth we saw in Q1 of 2019, which shows the continued demand in this growing space. Roku estimates 39.8 million active users as of March 31, 2020, which is a net increase of 3 million since December 31, 2019.
It estimates streaming hours of 13.2 billion, which is a 49% YoY increase.
Gross profits were in the range of $139 to $144 million, which suggests a growth of 40% YoY, while net losses were in the range of $60 – $55 million, compared to a net loss of $9.7 million for the same period last year.
As Roku scales internationally, profitable earnings are not expected within the next year. This is the part that Wall Street can often be uncomfortable with; however, it should be factored in that Roku’s revenue growth is solid. As stated above, it has little competition in the niche area of OTT it dominates with manageable debt.
Technical Analysis
Roku has moved in a clear uptrend off the March lows. It recently hit a wall of resistance, which includes a key level around $125-$120, the 200-Day SMA, as well as a downward sloping trend-line from its recent peaks.
With low participation at current prices, as exhibited in the volume, it will need to find more buyers to break through this region. The MACD shows weakening momentum on the daily chart and the RSI shows that its uptrend has broken, as well. We can expect a pullback in Roku in the coming days/weeks.
The key support level to watch is the $102-$86 region. If this zone is broken, we can expect a retest of the recent lows. However, if it holds, we expect new highs for Roku in the coming months.
This article was originally published on Forbes on Apr 30, 2020,03:15am EDTForbes on Apr 30, 2020,03:15am EDT
On recent earnings calls, Snap and Google have confirmed that record ad demand in January and February was met with a significant pullback in March. While many investors are speculating the bounce back in ad tech will happen as quickly as Q3, the respective companies are declining to comment on forward guidance for the rest of the year. This analysis will look at how this will effect The Trade Desk.
In my recent analysis, I question if the market has priced in the advertising downturn. Notably, Google has plenty of cash to weather a downturn while Snap has turned towards raising debt. Meanwhile, ad exchanges, such as The Trade Desk, are particularly exposed.
Here are a few reasons why I’m pivoting away from the bull thesis for The Trade Desk in 2020 and possibly into 2021.
The Bull Case for The Trade Desk:
To be transparent, I had predicted ad-tech to be one of the best tech trends in 2020. This prediction came true as January and February were record months for ad revenue. However, the story has changed now that large brands are reducing ad spend, or as Google recently said in their earnings report, March “experienced a significant and sudden slowdown in ad revenues.”
The Trade Desk is a “demand-side” or “buy-side’ ad platform which allows advertisers to buy ads in auction-like format through real-time bidding. This is an automated method for buying and selling inventory that eliminates the need to call up an agency or salespeople to place the ad. The official term for this is programmatic, and the trend is popular in ad-tech, with over 50 demand-side platforms that transact/broker programmatically.
By utilizing machines instead of salespeople, the cost of the ads go down and both parties (supply/publishers and demand/advertisers) prefer programmatic due to fewer middlemen and higher returns.
Strong drivers for The Trade Desk include omnichannel capabilities, which is the ability to buy ads across many channels, such as mobile, video, audio, display, social and native. The universal ad ID is another important differentiation as it offers an anonymized ID that helps track users, target audiences and provide attribution. This feature is rare for a third-party ad network and helps The Trade Desk compete with first-party data companies.
Connected TV ads is the segment with the most growth. Winterberry Group research predicts ad spending on addressable TV and OTT will see a 44% boost in 2020, while linear TV barely have a 1.9% increase.
Another major bull case for The Trade Desk is the trailing financials and growth have been solid. The company released its Q4 and 2019 results on February 27th. The total spend reached a record $3.1 billion in 2019, an increase of 33% year-over-year. Total spend in Q4 was $1 billion.
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Revenue grew 39% to $661 million with Q4 revenue growing 35% year-over-year to $215 million. Net income grew 23% YoY to $108.3 million.
Non-GAAP net income grew 42% and the company reported non-GAAP EPS of $3.69 compared to $2.70 for 2018. Quarterly non-GAAP EPS was $1.49 compared to $1.09 in the year-ago quarter.
Looking forward, The Trade Desk is expecting EPS of $0.45 and revenue of $797 million for the year — although this is likely to come under revision due to covid-19.
The primary reason that The Trade Desk may be more exposed in 2020 is that they are not the publisher of the content where the ads are sold. For instance, Amazon Fire will fill their inventory first from Amazon’s DSP before pulling from the secondary market (or further down the waterfall). As Amazon will likely illustrate, the only real moat that exists in advertising comes from owning the audience as a publisher — or even better — by owning the device.
There is also little loyalty from advertisers who will quickly switch to the next best-performing programmatic DSP. Switching costs for ad exchanges are very low and this creates fickle behavior in times of distress.
According to Interactive Advertising Bureau (IAB), digital ad spend is down 33% and 24% of advertisers are pausing all ad spend for the rest of the year. For the period between March through June 2020, 70% of buyers adjusted or paused their planned ad spend.
The ad industry is highly competitive, and the track record of third-party ad platforms performing well long-term is nearly non-existent following a a few years in the limelight (i.e. Millennial Media and Criteo). These ad exchanges saw how fickle advertisers can be when Google and Facebook expanded their ad platforms in 2012-2014 and the demand quickly shifted towards working directly with the walled gardens.
If you do not recognize these names, it is because Millennial Media’s stock cratered and was bought out by AOL while Criteo has also seen a drastically lower stock price over the past few years. In fact, there are very few cases where ad exchanges have done well for a significant period of time due to a lack of intellectual property, which becomes apparent during transformative shifts.
Most importantly, despite The Trade Desk having solid financials and growth, the company’s valuation is outsized. As of now, forward price to sales is at 21. If/when The Trade Desk lowers its revenue guidance, the P/S will be approximately 25 P/S — or the highest in its history. This is despite having the most uncertainty and the highest risk in the company’s history.
Conclusion:
The stock market may be rallying off Q1 ad-tech performance, yet the earnings calls have been very clear about the steep drop in ad revenue and uncertainty of when a rebound will occur. Facebook called it “facing a period of unprecedented uncertainty.”
One could argue that valuations are forward looking to a rebound in 2021. Yet, the majority of ads are closely tied to consumer spending.
Notably, The Trade Desk has been a recommendation of mine throughout the past and up until this month. The company may become a recommendation again in the future.
On Thursday, The Rubicon Project and Telaria announced plans for an all-stock merger. The combined companies state this will be the largest independent supply-side platform (SSP). Rubicon shareholders will own 52.9% and Rubicon CEO Michael Barret will become CEO of the new company with a stock ticker $RUBI. The deal is expected to close in the first half of 2020.
Aggregate revenue for the combined company grew 32% to $217 million for the year ending September 30, 2019. The combined company will also have $150 million in cash and no debt. Both companies had market caps around $350 million prior to the merger. The merger is expected to reduce costs by $15-$20 million with 600 employees.
The main benefit to this merger is that Rubicon will now be truly omni-channel (i.e. desktop, mobile, connected TV, video, etcetera) without having to build a connected TV platform, which can take two to four years.
In turn, Telaria is now able to attract larger media companies who want to work with fewer partners across various types of inventory. The combined company is a full-service SSP that will require advertisers and publishers to work with fewer vendors.
The company expects Connected TV ads to make up mid-to-high teens as a percentage of business. Previously, Telaria’s CTV ad business accounted for 44% of the most recent quarter’s total revenue.
Strengths and Weaknesses
Strengths
Supply-side is typically the better side of the deal when compared to the demand side.
On a high-level overview, this is because publishers (the supply side) own the content and the data, and therefore, they control the relationship. Advertisers are fickle and will quickly switch who they are working with according to the best pricing at the time.
Please note: there is a full-length report on the differences between SSPs (Telaria/Rubicon) and DSPs (The Trade Desk) in the Telaria PDF.in the Telaria PDF.
Telaria and The Rubicon Project onboard publishers. This provides a slight advantage to onboarding advertisers. Nearly every major success in advertising is on the publisher side. Facebook and Google own the content and the data. Gaming exceeds Hollywood and music more than 15X on revenue due to owning content and data with free-to-play alone/ad-supported exceeding Hollywood’s revenue alone. The Superbowl charges record-high prices by owning the content and the viewer data. Therefore, having a larger SSP in the Connected TV ad space is intriguing to say the least.
The most important strength and catalyst for the merger is Connected TV ads, of course. There are many statistics provided in the Telaria PDF and Roku/TTD PDF to support my conviction on CTV ads.
Read the Roku/TTD PDF here covering Connected TV ads.Roku/TTD PDF here covering Connected TV ads.
Weaknesses
Rubicon has some weaknesses around growth that are important to discuss. Although revenue was up 27% year-over-year, the revenue was flat at essentially 0% quarter-over-quarter at $37.64 in Q3 compared to $37.87 in Q2 2019. In Q4, Rubicon is guiding for year-over-year growth of 15-16% at $47 million-$48.5 million. The EV/revenue reflects the lackluster growth at 2.17 compared to The Trade Desk’s EV/Revenue of 19 and Telaria at 4.7.
According to the most recent earnings call, the CEO stated, “we got dinged by [new transparency methods] slightly.” Basically, what happened is some app publishers have not converted to the new standards (likely due to development constraints) and this is affecting demand (advertisers are starting to require the new transparency methods). The new transparency methods are app.ads.txt, which reduces app ad fraud by requiring app publishers to provide text files that list the ad networks authorized to sell their inventory.
Another issue affecting Rubicon is supply-path optimization, or sellers.json. In many instances, Rubicon is a reseller rather than the SSP with the direct relationship with the publisher. Advertisers are pushing back on resellers as more middlemen can increase costs in the real-time bidding process and create opportunities for fraud.
With that said, the aggregate company with Telaria and Rubicon combined has year-over-year growth of 32% for Q3 compared to The Trade Desk’s at 38%. It’s the lack of revenue in the most recent quarter and the upcoming quarter for Rubicon that is concerning (not the TTM).
Regarding weaknesses, I can’t stress enough that the advertising market is incredibly tough as there is not much intellectual property to stave off competitors. For SSPs and DSPs, it is a relationship-based business and a pricing war. I would personally not go long on any ad platform (that does not own the content) without a stop in mind. At the very least, a wide stop should be considered.
About Walled Gardens & CCPA
As Telaria CEO Mark Zagorski stated, this is “an opportunity for someone to create really The Trade Desk of the sell-side — a real alternative to those walled gardens.”
The walled gardens he is referring to are Google and Facebook. They provide little transparency to advertisers and publishers. Meanwhile, they lock publishers into their ecosystems, and advertisers with precise data targeting.
These two companies essentially wiped out the ad industry around 2014-2016 and both Rubicon and Telaria come from the wreckage of those years (Telaria’s path was covered in the PDF). This should be behind us now as what Google and Facebook did is increasingly seen as anti-competitive due to leveraging private data as a means of shutting down ad competitors.
One nod towards the end of the anti-competitive behavior was Amazon opening up its Connected TV ad platform. I am fairly confident this was to thwart any future legal issues and is a healthy sign that the days of iron-clad walled gardens may be behind us.
With that said, there will need to be some finesse from ad platforms on the privacy side. California has passed the California Consumer Privacy Act (CCPA) that will take effect very soon on January 1st. The law is a bit vague as to how to define the selling of consumer data, which Facebook is already preparing to fight.
The reason this is applicable to The Trade Desk or Rubicon/Telaria is these companies typically have various tracking code for omni-channel campaigns, such as TTD’s Universal Ad ID. Interesting enough, Telaria’s CTV ad platform could be protected as they are partnered with Nielson for data, an industry staple for nearly 100 years. Nielson typically collects data on viewing habits rather than on private individuals, so Telaria could actually have an edge if privacy laws prevent the tracking of individuals.
The above paragraph is not something to worry about right now, but I will be keeping an eye on it to make our readers aware if the CCPA extends to omni-channel tracking methods.
Conclusion
The ad industry is often messy and convoluted, which we are seeing with Rubicon’s most recent quarter. They’ve made it clear their intention is to compete with The Trade Desk. While TTD is the first mover, this merger can offer better data for targeting purposes due to being a supply-side platform.
There are many reasons to have an allocation to small caps in a portfolio. For one, they offer further diversification with a lower correlation to the broad market. However, the primary reason is that, over time, history has shown small caps tend to outperform the more popular large caps. According to Ibbotson Data, this outperformance, on average, is 2.2% per year.
The Set-Up
Ken French, the professor from Dartmouth who compiled the data in the graph above, discovered there is a seasonality for small caps when you average out all of the data we have going back to the 1920s.
From February through December, the average small cap stock tends to underperform. However, from Dec 20 – Jan 31, the average small cap stock tends to outperform by a noticeable amount
This data is showing that over the December 20 -January 31st time frame, the average relative performance of small caps over large caps is about 2.5%. This may not seem like a lot, however, keep in mind this is sourced from 89 years worth of data, which is statistically significant.
Today, we are seeing an important anomaly in the small cap region that we haven’t revisted in about 20 years.
The above chart shows that small caps, in blue, tend to do better during an uptrend, just like Ken French outlined, and also tend towards sharp reversals in downtrends. With more returns, typically comes more volatility. However, today we are witnessing a relative outperformance of large caps that we haven’t seen since the late 90s.
Euphoric emotion disconnected these two markets during the late 90s, while pessimistic emotions disconnected the markets today. The fear of a recession has taken the current market to levels we also haven’t seen since 2008. Mutual Fund/ETF equity outflows are at historic levels, and short interest has run above the historic average. The risk-on trades have been penalized, small caps being one of them.
Today, we are not only entering the season for small caps,but we’re doing so with small caps showing significant under performance relative to the broad market. If the fear of a recession was overblown, then small caps have some catch-up in order to revert to the mean.
To further build the case, the weekly chart above is showing that the RSI is breaking 60. This is a great sign for building momentum for small caps. In a healthy uptrend, we want to see the RSI above 60 and oscillating above 30 – the higher the oscillation, the healthier.
If we zoom in to highlight the last year, the weekly chart above is showing that small caps are starting to show signs of life. They are breaking above the 60 line on the RSI, the MACD is pointing up, and small caps have broken through their downtrend and closed above the resistance we’ve seen this year. Also, it’s worth noting that small caps are less than 10% away from all time highs.
Review of Our Small Caps (TLRA and WIFI)
Fundamental coverage can be found in PDF form by searching for the stock name.
Boingo Wireless (WIFI)
Boingo (WIFI) appears to have bottomed at the 50% retrace, which is ideal for a wave-2 bottom. We have gotten 5-waves off that low, which is also encouraging. It still has some work to do to confirm this uptrend, but so far, the structure is providing us with a 1-2 set-up pointing up. If it is valid, the 3rdwave is typically targeted around the 161.8% of wave-1, which puts us in a much higher region above the blue lines beginning around $13.50 with the potential to climb higher with a breakout.
If you want to go in on WIFI, I’d put a hard stop just under $9.55. Below this level invalidates the set-up and opens the door for more downside before a new uptrend can commence.
Telaria (TLRA)
Since we covered Telaria (TLRA), the stock is up about 12%. However, the structure is more ambiguous than WIFI, which is why I’m suggesting a tighter stop. I am leaning toward the more bullish set-up, which has us tagging the range in the red box above. However, we also have a potential 1-2 set-up pointing down. If TLRA closes below $6, this will invalidate the uptrend and suggest further downside.
KEEP IN MIND …
We have been leaning cautiously so far, and are due for a correction. Stocks are stretched as they are, and a correction would be healthy for further gains.
However, with the seasonality of small cap relative strength approaching in December/January, coupled with them breaking out right now, it’s worth acknowledging current set-ups are in place for two of our favorite small cap plays.
Connected TV advertising is in my top three favorite tech trends for near-term gains, as discussed in the PDF that covers Roku and The Trade Desk. This is a massive opportunity that is occurring right now and should be given close attention.
Connected TV takes the best part of mobile (audience data) and combines it with the best part of television (brand messaging). This is a very important trend for brand dollars that should not be dismissed as “eyeballs migrating to OTT.”
The opportunity is much larger than represented by the number of people who are cutting the cord as
Connected TV ads are not merely a 1:1 ratio. Rather, these ads represent a higher ratio as the demand (advertisers) consider the medium more valuable. There is evidence that Connected TV is closer to a 2:1 and up to a 5:1 ratio in terms of its value to advertisers in terms of the rates they are willing to pay.
It may be hard for investors to imagine that some advertisers don’t like working with Google, Facebook and mobile or desktop, in general. This is a very real issue in the advertising world. Many big brands are not convinced that these mediums offer true, lasting impressions. They also do not trust the measurement offered as it’s behind a blackbox that they have no control over. Nielson offers an audience measurement system that many brands are accustomed to for traditional television.
Below is an illustration of television holding its own against mobile. Keep in mind, this is despite 5 billion mobile devices entering the market over the past decade compared to 2 billion television sets. The 34% who have held onto their television budgets are the advertisers this PDF is referring to, plus any of the remaining advertisers who are frustrated with a lack of measurement and click fraud on the other mediums.
Connected TV ads already see a $20 average revenue per user, according to Roku’s earnings. This is 200% more than social ads, such as Twitter, at $9 ARPU. It took Facebook over a decade to surpass $20 per user while we can trace the relevant emergence of Connected TV ads to late 2017/early 2018. You’ll also see below that Telaria’s CPMs on Connected TV ads are nearly 5x higher than average CPMs and have surpassed Facebook’s CPMs at the height of its dominance (and even with all of that Facebook data).
For quick reference, here are some CTV ad statistics referenced in the August PDF which related to the overall size of the opportunity:
Mobile’s share of programmatic video will peak in 2020 at 53.9%. By 2021, mobile’s share will dip below the 50% mark due to the rise of CTV ads.
To illustrate the growth of CTV, SpotX saw the share of impressions it serves through connected TV increase from 15% in Q1 2018 to 33% in Q1 2019. Innovid also saw CTV ads jump from 13% to 27% and Extreme Reach reported an increase from 15% to 44% over the time span of a year. Telaria reported triple digit growth in revenue from Connected TV ads at 133% year-over-year.
To date, CTV ads account for $8.2 billion of the $70 billion spent on global TV advertising in 2018. Data is driving personalized ads with data-driven video increasing 79% in 2018. Customized ads combining localization and personalization can generate over 12,000 unique versions with the largest customized ad having over 200,000 customized versions. This provides an engagement lift of over 78%.
According to CMO.com, an eye-tracking survey revealed that TV commands 2x the active viewing attention compared to YouTube and 15x the active viewing attention of Facebook. Completion rates are also higher on connected TV at 95% compared to 75% on desktop and 72% on mobile. Brands are convinced they should integrate with digital audience data with 28% saying they have already done so, but 68% plan to do so by September 2019.
Telaria Overview
Telaria is a volatile small-cap stock and even solid earnings has not helped to stabilize the price. Revenue was up 47% with the CTV business growing 133% year-over-year. Gross profit of $14.7 million was up 31% year-overyear in the last earnings report. The company increased the full year revenue guidance to $68-$72 million, up from $66-70 million.
When comparing Telaria to other connected TV stocks on the market, the two differentiators are that it’s headquartered in Israel, which may position it better for global inventory. The opportunity for CTV ads is global, and this could be a major positive for Telaria.
The second differentiator is that Telaria is primarily a sell-side or publisher platform – rather than a demand-side platform. For comparison purposes, The Trade Desk is a demand-side platform. More on this below.
Telaria is not a pure play but they are focused enough on connected TV to almost meet the criteria. They also sell mobile and desktop inventory, which is not as interesting to me in the current environment as these are not hyper growth categories.
Telaria Fundamentals
The most important key metric to focus on in Telaria’s report is CPMs, or the cost per 1,000 impressions, which grew from $11.58 to $15.41 year-over-year. These are very impressive CPMs, although not entirely surprising as in my previous report, I have stressed the importance of CTV ads for brand advertisers.
Brands who have the big advertising budgets, such as Coca-Cola, Geico, McDonalds, etcetera, are willing to pay much more for television. Compare this to Facebook’s 2018 CPMs which are driven by hordes of data and were considered “skyrocketing” when they hit $11 CPM at Facebook’s 2-billion user peak in 2017-2019.
Due to Connected TV ads and high CPMs, Telaria was able to report $2 million over the $15.5-16.5 expected at $18.2 million in the last quarter. The company reported adjusted EBITDA of $1 million with EPS of -$0.03.
Full year guidance was raised from $66-$72 million to $68-$72 million with Q3 2019 guidance at $16-$17 million.
Notably, there is no long-term debt on the balance sheet and the company has $58 million in cash.
Valuation is another area where Telaria checks quite a few boxes. Roku and The Trade Desk can wildly fluctuate, but at time of writing, forward price to sales is 14 for both companies while Telaria is at 4.8.
In the recent earnings report, leadership stated, “This quarter, we also advanced our technology leadership by becoming both the first video platform to provide Nielsen verified audiences to programmatic CTV buyers and by launching our addressable audience targeting solution.”
This is intriguing as traditional television buyers are impartial towards Nielson for measurement and verified audience purposes. The majority of the television advertising industry is tied to Nielson data.
The company also expanded the addressable market feature, although addressable is a common offering among
ad companies these days. The more important announcement is Nielson as the brands who are buying Connected TV inventory rely on Nielson for broadcast and linear television ads.
As you’ll see in the Risks section below, executives at Telaria come from Nielson, which is an interesting advantage for supply-side partnerships.
Sell Side Vs. Demand Side
Put simply, the sell-side works with publishers (inventory or supply). For Connected TV, the publishers are the apps where you view content: Hulu, HBO, Netflix, Vudu, ESPN, etcetera. Sell-side platforms have direct relationships with publishers.
The demand-side works with advertisers (demand). This is companies like Expedia, Coca-Cola, Geico, McDonalds, T-Mobile, Verizon, BMW, Mercedes, and sometimes other publishers who want to advertise their services (ESPN could buy advertising on Vudu, for instance).
Programmatic is real-time bidding that removes salespeople. Ad companies often talk up this piece, but in reality, just about all ad-tech is programmatic and offers real-time bidding these days (and has been since about 2012-2014 when ad-tech underwent this evolution for mobile and desktop ads). This is not a differentiator. It does help to facilitate more ad placements and some brands who were adamantly against mobile or desktop will use programmatic for the first time with Connected TV.
There are strengths to the sell-side approach. The first is that switching costs are higher for publishers than for advertisers as publishers have to install software into their applications to serve the ads. They’ll typically limit the number of sell-side platforms they work with as it can create app bloat to broker with too many sell-side platforms (SSPs).
Telaria advertisers an impressive client list, including Sling, Hulu, PlutoTV, A&E and the Discovery Channel. One thing to note: ad-tech companies can integrate via server to server rather than through software. The latter is a much stronger relationship. Telaria, and other ad-tech companies, typically don’t disclose if the client list is a direct software installation or a server-to-server integration. In the case of a server to server integration, the switching costs are not high and the relationship is similar to DSPs who have to consistently outperform in order to win the business.
For example, Telaria may have a direct relationship with Warner Brothers but not with Hulu (who likely uses more than one SSP).
To contrast, the demand-side is almost never loyal and almost always has low switching costs. Often, advertisers will run campaign tests across as many as twenty DSPs and will run the campaign on those who perform the best. This is the downside to programmatic and server-to-server integrations across ad exchanges. Even when the SSP is a server-to-server integration, they are not as aggressive as advertisers in switching.
It requires very little time or energy to run these tests. Some advertisers will repeat this process frequently before every campaign, going with only the DSP who is performing well in that month. DSPs will differentiate among themselves with features such as omni-channel advertising to become a one-stop shop for campaigns across multiple mediums and device types.
Of course, as the world is well aware at this point, data is king. The publisher will be paid more if the advertiser can target the audience with more precision. Therefore, the sell-side has an advantage because the direct relationship with the publisher provides the best data. To illustrate, Roku is a publisher of the Roku Channel and a platform owner, as well. There is a lot of data here from these sources, and therefore, the average revenue per user is very attractive at the $20 ARPU.
Demand-side platforms, such as The Trade Desk, rely on the identifier for advertisers (IDFA) from Apple and their own Universal Ad ID. This helps to track the user for omni-channel advertising and retargeting, such as when a person switches from watching OTT apps to browsing on mobile. However, the playing field is equal for IDFA across all advertisers while The Trade Desk is attempting to have an advantage with their own proprietary Ad ID.
When comparing apples to apples, the sell-side is better positioned as they hold the data and the inventory in a space that is more limited in inventory than in advertisers. The relationship that is created by installing software holds more weight than the relationship that is dependent on monthly pricing.
You can see evidence of the value of SSPs historically in the mobile ecosystem. The larger players acquired sellside platforms, such as Google’s acquisition of AdMob for $750 million and Twitter’s acquisition of MoPub for $350 million. These ad companies have little reason to acquire a DSP as this is where they already excel and is easy enough to build, if you have the data. Similarly, Facebook acquired LiveRail for $500 million for its premium video publishers.
Risks
As noted in the supply-side discussion, ad-tech companies don’t disclose if their client list is a direct software installation or a server-to-server integration. The impressive client list that Telaria discloses, including Sling, Hulu, PlutoTV, A&E and the Discovery Channel, may be brokered to Telaria through server-to-server integrations rather than directly served through ad software. This is a risk because another SSP can easily establish a serverto-server relationship through a web of ad exchanges. Direct software is a more protected relationship.
A primary risk is that Telaria does not have a straight path behind ownership and management. We do not have a passionate-founder type like Anthony Wood or Jeff Green at the helm. I’ll outline what I’ve been able to gather and add some information as to my experience with ad-tech companies during that era.
Founded in 2012, Telaria’s former company, Taptica, was a mobile user acquisition company. Interesting enough, Neilson EVP Itzhak Fisher was an early investor, which may be why we see Nielson recently partnering with the company on audience measurement. By April of 2014, Taptica wasn’t doing well and sold a purchase option for a $1.5 million line of credit. By October 2014, Marimedia purchased Taptica for $13.6 million.
By May of 2015, the company issued a profit warning and Marimedia changed its name to Taptica. The company then went through a series of acquisitions, including Tremor Video’s demand-side platform for $50 million. There were mergers in 2018 and 2019, resulting in Taptica renaming itself to Tremor International.
Notably, Hagai Tal, the CEO had to step down due to concealing material facts during a sale in 2011. The former CEO of Matomy Media, Ofer Druker, then took over as CEO of Taptic and Termor International. Mark Zagorski has been CEO of Taptica since 2017, and has connects to Nielson, having served as CEO of a Nielson company named eXelate, and EVP of Nielson’s Marketing Cloud.
Needless to say, the history is complicated. Taptica and Telaria have decent client lists, which helps. This was an era which was particularly hard on ad companies. Part of the anti-trust issues we see with Google and Facebook is that they forced many ad-tech companies out of business.
There is always a lot of risk when investing in an ad-tech company, and I pointed this out with my analysis on The Trade Desk. There is endless competition as there is no intellectual property to speak of. Advertisers are looking for the best addressable media at the best price, and publishers are looking for the highest returns. Whoever is capable of climbing to the top of the pile (of the 2,000 ad-tech companies on the market) usually isn’t there for very long (1-3 years) The only exceptions are if you have proprietary first-party data or other direct relationships.
Technical Analysis
By Knox Ridley
Telaria (TLRA) has had a rather complex structure ever since it began trading in 2013 under Taptica/Tremor. In fact, its all-time high occurred on its IPO around $11.09. Since then, its structure has been a complex, overlapping, corrective (A,B,C) structure up until today.
In other words, it bottomed in early 2016 at $1.29, and though it’s been in an uptrend, that uptrend has been characterized by a series of 3-wave corrective moves. This would put us in the final C-Wave push of this uptrend. So, after a massive move from $1.29 to $10.66, the structure of this uptrend seems to be part of a larger degree corrective structure, which is highlighted by the blue A,B,C.
That being said, the structure of TLRA is not as reliable as the current trend currently in place. Time and time again when I’ve seen these larger-degree, corrective moves up, over time, and with some additional momentum, morph into a larger degree 5-wave structure, which I never want to miss out on.
Or, I’ve seen them morph into an even more complex structure or extend to much higher levels. This can be especially true when analyzing the charts of small to micro-cap stocks that are thinly traded. In short, seeing a complex corrective structure in a small cap stock, I take this as the market not really sure what to think of TLRA at the moment.
As you can see in the chart, TLRA reached the 100% extension of the A wave (A=C in blue), and then turned down hard. It found support at the 23.6% retrace level, which coincides with the 200-day moving average. I outlined this region in yellow, and would place a stop just below $5.75. Below this region and the likelihood of closing the massive gap around $3.70 becomes elevated. This will provide entry with a rather tight stop – low risk with high reward.
Furthermore, the MACD has found a base, and is now turning up, while we go into earnings.This is a sign that momentum is shifting back to the upside. Also, note the volume has elevated to new heights, which is signaling increased interest, which has been heavily tilted to the long side. With volume lowering into this pullback, and the stock resting over the 200-day, it appears that TLRA is in a wait and see mode with their earnings on deck.
