The Rocket Scientists of Ads

It's rare to see a technology company, much less one involved in advertising, to so predominantly display a focus on scientists. In the case of Rocket Fuel (NASDAQ: FUEL  ) , the ad tech firm that recently had a spectacular IPO focuses on using artificial intelligence, or AI, and big data to drive predictive modeling and automated decision-making. In essence, the company believes that sophisticated machines can optimize business outcomes for advertisers as the digital world moves at the speed of light. The company focuses on programmatic buying via real-time bidding, or RTB.

In order to achieve those efforts, it proudly focuses on data scientists that are from prestigious universities such as Massachusetts Institute of Technology and Stanford University. The company claims award-winning computer scientists with a focus on a machine-learning as a prime driver of success.

The pre-IPO results prove that theory to be working, but can the data scientists construct a profitable company?

Shockingly fast growth
Though the IPO doubled during the initial trading day back on Sept. 20, the company might actually have underperformed due to the negative ad tech stigmatism. Rocket Fuel reported rocket like growth in the S-1 filing with revenue surging 134% to $92.6 million in the six months ended June 30. Considering that advertising spending is typically back-half loaded, the company could be on a pace for $250 million in revenue this year based on the same quarterly percentage as 2012.

Part of the reason the stock has been held back were the weak results in other IPOs and the relatively low multiple AOL (NYSE: AOL  ) paid for Adapt.tv, operator of a programmatic video platform for brands and agencies. The valuation becomes a quick question when Adapt.tv decided to sell for only $405 million or roughly 5 times trailing revenue, even though it had seen revenue surge over 100% per year over the last three years. With the deal taking place in early August, it is possible that Adapt.tv agreed to the buyout at the lowest possible level.

The value sure isn't based off the forecast sited by Magna Global that RTB for digital advertising is expected to jump from $4 billion in 2012 to $16 billion by 2016.

Big data equals big value
A prime reason that the valuation of Rocket Fuel appears low are the values applied to big data software providers. As an example, Splunk (NASDAQ: SPLK  ) provides a software platform for real-time operational intelligence and investors have awarded the stock a valuation of over $6.5 billion on revenue growth of 40%--that appears stationary compared to Rocket Fuel. The Splunk software allows customers to gain visibility and operational insights into their machine-generated big data.

In essence, both companies are growing extremely fast by providing the ability to summarize vast amounts of data to make business decisions. In the case of Rocket Fuel, the company actually utilizes that data to programmatically operate the advertising function.

Profits, profits, profits
Investors are naturally concerned about the profitability of Rocket Fuel, yet Splunk continues losing money without alarming investors. Rocket Fuel only had an adjusted EBITDA loss of $4.3 million in the first six months of the year so it could easily slowdown sales and marketing spend to become profitable for the short-term. The company though has an enormous opportunity to not only capture the massive growth expected in the RTB sector, but also the ability to convert the even greater segment of advertising. It already generates close to a 200% revenue retention rate, which is unheard of to have existing customers nearly double the money spent with Rocket Fuel.

Bottom line
With the complexity of hundreds of mobile devices, websites, and up to billions of potential consumers, one can quickly conceive the benefits of how programmatic buying and RTB would help brands improve ad spend in the digital age. Rocket Fuel appears set to utilize data scientists to fuel massive growth in the future.

Need the inside scoop?
Wall Street has been getting rich on trading floor tips for decades -- and for decades, those tips have been “for industry insiders only.” But not anymore. Our top technology analyst recently infiltrated one of the finance world’s most exclusive gatherings… and left with three incredible investment opportunities, straight from the CEOs. These are profit-building strategies Main Street isn’t meant to hear about -- so act now before someone shuts us up. Click if you want “industry insider” earnings -- NOW!


Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2013, at 7:09 PM, neamakri wrote:

    I cannot find an internet definition of "back-half loaded". Please explain your jargon.

    Anyway, as far as real-time-bidding (RTB), what do they intend to buy?

  • Report this Comment On October 07, 2013, at 11:11 AM, maholder wrote:

    Back-half loaded is a common phrase used by management teams to refer to business or sales that is focused on the second half of the year. Retail and hence advertising is typically focused on the 4Q.

    RTB is the real-time purchase and sale of advertising inventory on an impression-by-impression basis on advertising exchanges.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2669042, ~/Articles/ArticleHandler.aspx, 9/22/2014 2:17:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement