Digital advertising in the U.S. is forecast to reach $58.61 billion in 2015, according to eMarketer. Facebook (NASDAQ: FB) and Google Inc. (NASDAQ: GOOG) are the two biggest players in the digital advertising space.
Both companies have introduced products to lure advertisers. While Google still has a significant share of the market, Facebook is catching up. Last year, the social networking giant registered stronger year-over-year growth in digital and mobile ad revenue than Google.
Recently, Verizon Communications (NYSE: VZ) acquired AOL Inc. One of the reasons VZ acquired AOL was because of the latter’s suite of advertising technologies for online and traditional media. AOL itself had acquired Millennial Media, a mobile advertising company.
The fact that big names like Google, Facebook and Verizon are focusing on digital advertising highlights its importance.
One of the fastest growing areas within the digital advertising space is location-based mobile advertising. And one of the most promising companies in this space is SITO Mobile Ltd. (NASDAQ: SITO). SITO uplisted its shares to the NASDAQ earlier this year.
At current levels, SITO’s recent developments and the company’s potential are not priced into the stock. One of the most important developments this year has been the acquisition of Hipcricket’s mobile advertising business. The company acquired the business back in July in a transaction valued at $3.7 million. The acquisition will allow SITO to tap new revenue streams for its mobile advertising business through Hipcricket’s existing customer and relationships with both advertisers and brands. It will also boost SITO’s product offerings.
In July, SITO also announced a partnership with LiveRamp. The partnership between SITO and LiveRamp will allow marketers to use their CRM data within SITO’s products to reach consumers with highly relevant, targeted ads. Commenting on the partnership, SITO Mobile CEO Jerry Hug said that combining first party CRM data with unique to mobile data such as location and device ID will enhance SITO’s audience targeting and reach. Hug added that the integration has already led to new revenue from current partners and will allow SITO to provide an offer that is in demand by many large auto and retail advertisers looking to interact with their current and lapsed customer base.
The acquisition of Hipcricket and the partnership with LiveRamp will allow SITO to further boost its product offerings. Remember that the company is the only pure play location-based mobile advertising company. The location based advertising market is being driven by increasing use of smartphones and tablets.
The acquisition and partnership will also boost SITO’s financials, which are already quite impressive. In the most recently reported quarter (Q3), SITO saw a 72% increase in its revenue. The company also improved its gross margins significantly. The year-over-year increase in revenue was driven by the company’s Media Placement business, which saw a 32% sequential growth in the third quarter. Margins in the Media Placement business were an impressive 68%.
The outlook for the fourth-quarter results, which are scheduled to be released in November, is bullish. This does not come as a surprise as the location-based mobile advertising industry continues to see robust growth.
Another reason to like SITO is the company’s world class Board, which includes Betsy Bernard. Mrs. Bernard is an experienced executive, having led AT&T Consumer business. She was listed on Fortune magazine’s list of “50 Most Powerful Women in Business” for three successive years.
Mrs. Bernard and other Board members, Joseph Beatty and Philip Livingston, have also bought shares in SITO recently. The three directors in all have bought more than 31,000 shares in recent months.
Interestingly, the insider purchases came at a price higher than the current levels. SITO is trading at just around $3 and the company’s market cap of around $50 million is just 20% of the price AOL paid to acquire Millennial Media. Based on SITO’s growth prospects, the stock looks significantly undervalued at current levels. In the first three quarters of fiscal 2015, SITO generated sales of $11.3 million. Even by conservative estimates, the company’s revenue in fiscal year 2015 would total $15 million, representing an increase of more than 50% over the previous year. If SITO’s revenue continues to grow at this pace, they would reach almost $50 million by the end of fiscal 2018. Based on this estimate, SITO is currently trading at just 1x sales, which is too low for a company engaged in a high growth industry like location-based advertising. If the multiple moves to around 3x sales, SITO could see an upside of 200% from current levels. And remember that a multiple of 3x is still conservative. Most stocks in high growth industries trade at a higher multiple. For example, the biotech sector trades at a multiple of 10x sales. If SITO were to trade at this multiple then the fair value for the stock would be around $30 per share.
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