Key Points

  • Digital data privacy is of increasing concern, and LiveRamp’s data-neutral platform could benefit from updates to data collection and use practices.
  • The company also turned free cash flow positive in its latest quarter.
  • This is a small company with a market cap of just over $4 billion, but has cash and equivalents of $651 million.

Our experts issued a rare "Double Down" Buy alert on this one stock... Learn more.


Shares of digital data platform LiveRamp (NYSE:RAMP) have been off to the races this year. The stock has more than doubled since the market crash in March, so a breather following the most recent quarterly update (for the three months ended Sept. 30, 2020) was in order. But some investors chose to focus on disappointing guidance for the busy holiday shopping period to close out the year. No matter -- I still think this small company has plenty of promise in the years ahead.

Illustrations of devices and digital services in honey comb shaped cells.

Image source: Getty Images.

Riding an economic rebound during the summer months

While the economy overall is still a mess in the wake of the economic lockdown back in the spring, all things digital are doing just fine. As for LiveRamp specifically, many of its customers were affected by the sharp downturn, but have enjoyed resurgent growth lately as organizations quickly adapt to the new digital era that is dawning. This showed up in the numbers for the company's fiscal 2021 second quarter that were reported earlier this week.

Metric

Three Months Ended
Sept. 30, 2020

Three Months Ended
Sept. 30, 2019

Change

Total revenue

$104.7 million

$90.14 million

16%

Total gross profit margin

66.7%

54%

12.7 pp

Net income (loss)

($23.97 million)

($40.20 million)

N/A

Adjusted EBITDA

$3.892 million

($15.90 million)

N/A

Pp = percentage point. EBITDA = earnings before interest, tax, depreciation, and amortization. Data source: LiveRamp. 

The results handily beat management's previous guidance for revenue to be $100 million, and fast progress toward unadjusted break-even is also a positive. So why have shares tumbled by double-digit percentages since the report? Because of the company's guidance, specifically an anticipated slowdown in growth in the current quarter. The stock had gotten ahead of itself leading up to the quarterly update, and LiveRamp expects revenue to increase just 11% year-over-year in the final months of 2020. The company habitually under-promises and over-delivers, but a pullback was nonetheless inevitable.

3 reasons to be bullish on LiveRamp

There is still lots of promise for this small technologist, though. It isn't the fastest-growing digital data name around, but with a market cap of only $4.2 billion and trading for just 10 times trailing 12-month sales, I'm interested in adding to my position. Here's why.

1. Data privacy changes favor LiveRamp's platform

Digital data privacy has been a big concern, and it seems the issue is coming to a head. Apple (NASDAQ:AAPL) is making changes to its operating system to eliminate third-party cookies that track user behavior, and General Data Protection Regulation (GDPR) in the European Union and California Consumer Privacy Act (CCPA) are already in force. Big tech has been in regulators' crosshairs for a while now. LiveRamp has a solution that works as data practices get updated. In fact, LiveRamp's data-neutral tech was recently selected by The Trade Desk (NASDAQ:TTD) to power its advertising ecosystem, and LiveRamp claims its Authenticated Tracking Solution (ATS) works better than traditional tracking cookies anyway.

Other tech platforms like Magnite (NASDAQ:MGNI) have made similar comments regarding data privacy changes being a long-term tailwind. As big tech adapts, LiveRamp will have the opportunity to make further headway. 

2. Don't ignore the bottom-line

Revenue growth may be moderating for now at LiveRamp, but there are other factors at work that will push the stock higher. Though it still operates at a net loss, LiveRamp has turned free cash flow positive -- revenue minus cash-only operating and capital expenditures, basically what gets added to the balance sheet each quarter. At just $5.95 million in the last quarter, it isn't much. However, as LiveRamp adds customers to its data subscription platform and reaches a more efficient scale, increases in profitability could be dramatic. And more cash flowing into the business means more operational flexibility to invest in research and development and to promote growth. 

3. Mergers and acquisitions are a real possibility

And speaking of ways to promote growth, LiveRamp says it continues to look at strategic mergers and acquisitions and other partnerships as a primary way to expand. And the company has plenty of headroom to do so. At the end of September, LiveRamp had $651 million in cash and equivalents and zero debt on its balance sheet. That's an ample war chest for such a small business. Paired with fast-improving profitability, this cloud-based digital data platform has lots of opportunity ahead of it. 

Not perfect, but plenty of positives

The latest quarterly report wasn't perfect, and the company's revenue growth trajectory is something to keep an eye on here. Nevertheless, there are plenty of positives working in LiveRamp's favor right now. I'll be buying more shares in the month of November.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.