Why Rocket Fuel Inc. Is Ready to Relaunch

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Rocket Fuel Inc.  (NASDAQ: FUEL  ) bounced back 5% this morning after BMO Capital upgraded the artificial-intelligence digital advertising company from "market perform" to "outperform."

So what: Despite the upgrade, analyst Daniel Salmon lowered his price target to $50 (from $65), representing about 32% worth of upside to yesterday's close. While momentum traders might be turned off by Friday's big drop -- fueled by a disappointing Q3 -- Salmon believes that the punishment was overdone, presenting patient investors with a tasty turnaround opportunity.

Now what: BMO sees Rocket Fuel's risk/reward trade-off as a rather attractive at this point. "Weak results and guidance from Tremor Video (TRMR, Not rated, down 49% on Friday) exacerbated a valuation reversal for the ad tech group that peaked around the Criteo (CRTO, Not Rated) IPO on Oct. 30," noted BMO. "FUEL's 3Q13 revenue of $62.5 mn (+132% yoy growth) beat our estimate of $59.5 mn and consensus of $59 mn. The revenue retention rate of 178% (i.e., current client budgets up 78%) held up well versus the seasonally stronger 2Q (180%). And social-mobile-video revenue tripled yoy to 26% of the total, helping power 40 bp of revenue ex media cost margin expansion." Of course, when you consider the long-term margin and competitive uncertainty still surrounding Rocket Fuel's business model, conservative Fools would probably do well to maintain their distance. 

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  • Report this Comment On November 22, 2013, at 10:50 AM, prasadnaik79 wrote:

    Fools,

    I am really impressed with the growth(155m from 66 m for nine months) that the Company has shown of 150+% Year over Year and almost 130% Qtr over Qtr in Sept 2013 ($66m from $27m) . Although still loss making, if they carry the pace at which they are growing, this should be a profitable cash cow in 2014 is my gut given the 48% gross margins that they enjoy.

    Being relatively new company, it is putting lot of money in marketing efforts but I am sure it is using its own technology to grab new clients and keep the pace of growth ;) as its revenues growth is suggesting.

    Losses are only about 3% of the revenues which can be wiped off if they curtail their Marketing spend, but I don't think CEO is worried about the bottom line at this stage. they are making this company ready to soar higher in terms of revenue and gaining market share.

    I heard the CEO on mad money and he was positive about the technology petted against the like of advertising search engines like Google. definitely a winner stock in the digital advertising.

    This stock could be the TSLA of advertising world is my feeling with its disruptive technology. Lots of raving fans in form of customer testimonial already. I m not sure who it has managed to stay under the radar of the investing circle, but it is ready to rocket its way to moon as its name suggests - Rocket Fuel it is!!!

    David, Tom what are your views...

    I purchased this stock at $49. I don't like roller coaster rides, but this might be the one I would like to get on with a long term horizon. Even if I say it gets back to it 52 week high of $70, that's still 30%.

    Fool on.

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