5 Companies Banking on Digital Marketing

Facebook has 845 million active users, Twitter has 140 million, and Google+ has more than 100 million. That's a lot of people looking at social networks, and advertisers are hoping to cash in on the exposure. Advertising firms from Ogilvy to ExactTarget (NYSE: ET  ) are ramping up operations to provide solutions to companies. Investors have an opportunity to get into this growing sector through five of the biggest names in the business.

Tell me again why we're doing this
According to a study by Microsoft Advertising, 55% of heavy social-media advertisers plan on expanding their spending during 2012. The study's organizers interviewed people at 713 companies that combined to spend almost $1 billion on social-media advertising. The companies cited word-of-mouth marketing as the main reason they were interested in social media.

Companies are increasing their focus on word-of-mouth marketing because studies have shown that personal recommendations are the most trusted type of marketing available to brands. This emphasis on trust has become increasingly important since the financial crisis and the resulting fallout for corporations, many of which are still trying to rebuild customer relationships.

Social media provides brands a way to interact directly with customers and to build personal relationships. Customers who feel they have a connection to a brand will then recommend that brand more readily and social media is increasingly becoming the medium of recommendation.

The social world is still wild, in a marketing sense. The number of channels is expanding every week and each one has its own special flavor. Facebook gives us a place to recreate our lives, Twitter makes it easy to talk to or yell at huge corporations, Google+ is a great place for posting things that you don't want anyone to read. With all the options for relaying a message, companies are understandably looking for some guidance.

Enter the marketers
While traditional advertising firms are happy to get in on the action, more specialty firms are popping up to support companies that need help. The table below summarizes some of the more popular public firms. You'll notice we're going to look at a revenue ratio instead of an earnings ratio; all of these firms have been investing heavily, and only Constant Contact (Nasdaq: CTCT  ) had a profitable 2011.

Company

2011 Revenue Growth

Year-to-Date Stock Growth

Price/Sales Ratio

(Lower = Better)

Vocus (Nasdaq: VOCS  ) 19% (44%) 2.0
Millennial Media (NYSE: MM  ) 117% N/A* 13.7
Jive Software (Nasdaq: JIVE  ) 62% 80% 20.1
Constant Contact 23% 16% 3.9
ExactTarget 55% N/A* 8.0

*ExactTarget and Millennial had their IPOs in 2012.

Vocus is the group's laggard and the cheapest of the bunch. The company had a slow-growing 2011 and compounded its losses by forking over $169 million for email marketer iContact. While this will hopefully show returns in 2012, the company didn't have as much success in 2011.

On the other hand, 2011 was very good to Millennial Media. Its skyrocketing revenue was due to its focus on the mobile ad arena that, with the rise of smartphones and tablets, has seen fantastic revenue growth. The company offers an array of advertising solutions that allow application developers to integrate ads into iPhone, Android, and other apps.

Jive has had a fantastic run recently as reflected in the stock's price. The company just announced a new gamification offering that promises to increase customer engagement. The underlying premise is that people are more connected to everyday tasks -- buying things, recommending things, etc. -- if their actions are rewarded with points or achievements. If the product catches on, 2012 will be another stellar year for Jive.

Constant Contact and ExactTarget are in the business of combing customer data to give companies more accurate information about who they're targeting with social media. These firms run email and social campaigns for subsets of customers. They're slowly replacing the "Dear MR. SMITH" method that has been popular for so long.

As tailored marketing increases, these companies, and their future competitors, will play a larger role in advertising. Until the market explodes with these sorts of firms, ExactTarget and Constant Contact should continue to be strong players. While neither company could be considered a value play, both seem priced for realistic growth.

How to use it and what to watch for
Apart from Vocus, which ironically has lost focus, the other four firms all have the potential for great growth over the next few years. A great deal will depend on their ability to adapt to and integrate the expanding social-media landscape. If any firm falls behind that curve, it will quickly disappear.

Watch Jive to see how its new venture performs and both Constant Contact and ExactTarget for new competition. The barriers to entry in this field are fairly low and a smart competitor from the old guard could easily steal market share. Millennial should continue to perform well, and it's my pick of the litter. We'll only move further toward the mobile world that Millennial thrives on and the company's head start makes it almost uncatchable.

The social revolution is just one piece of the online puzzle. Another can be uncovered in the Fool's report "The Two Words Bill Gates Doesn't Want You to Hear..." You can access it for free and get a leg up on the rest of the investing world. Go read it now.

Fool contributor Andrew Marder has no stake in any of the stocks mentioned in this article. Motley Fool newsletter services have recommended buying puts on Constant Contact. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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