Rocket Fuel IPO and Stock Review
Rocket Fuel Takes Off as its initial public offering in September on the NASDAQ was eye-catching for two reasons. First, the name evokes images of the huge Saturn rockets of the past blasting into the stratosphere (perhaps a link to the nostalgia associated with the memories of the President Kennedy era that dominated the news this week). Second, the share price itself matched its ambitious name, debuting at an intra-day high of $59.95 before closing at a marginally lower $57. This reflected a value that more than doubled the offer price of $29 per share, which itself was revised up from the original range of $24-$27. The most recent trading price of the stock has largely held on to these stellar gains with the most recent quote being $45.00 (As of Monday, November 25th).
So what was behind this stellar debut, and can the stock continue to perform at the lofty heights that the market has clearly priced it at? This newsletter looks at the business, financial metrics, strength of the business model to arrive at a conclusion about the investment case pertaining to Rocket Fuel.
Understanding the Business
The name of the company is one of the many amusing quirks of Wall Street where the name has nothing to do with the operations. Therefore Rocket Fuel has nothing to do with explosives, combustible fuel sources, space flight or avionics.
The business has to do with providing the nuts and bolts that advertisers and their client businesses can use to build bigger and better targeted advertising campaigns. There are suite of products to achieve this but the unifying theme is that the mission of the company is to provide masses of harvested data (big data to use the current buzzwords) that is collated and synthesized by artificial intelligence programs to optimize the useability of that data. In simple terms? More data, better sorted for the goal of improving companies marketing return on investment. So how does that translate in terms of revenue?
Metrics and Measures
The Rocket Fuel (FUEL) IPO raised in an impressive $116 million for its founders and investors, which include Nokia Growth Partners as well as an array of private equity backers. These early stage investors were likely attracted by incredible revenue growth of 139% between 2011 and 2012. This trend continued to 2013 with revenues again up by 134% on the previous corresponding period, tallying $92.6 million. The company also avoided the fate of stock price falls of other advertising companies to hit the stock exchanges this year, notably Tremor Video and YuMe. Worryingly, Rocket Fuel does share similarities with both these market disappointments, with the fundamental measure of any company, profit, non-existent with operating losses of $11.9 million in the first 6 months of 2013, despite the impressive revenue numbers. In addition, this drift away from profitability is growing, another negative strike against the numbers.
How Does it Make Money?
The basic premise of Rocket Fuel is that it uses an automatic algorithm and program that executes auto-bids on advertising slots that it matches with the needs of its user clients. In this way it seeks to differentiate itself from the other “network” advertisers, and may also go some way to explaining the out-performance to date of its stock relative to its peers. The company is paid money for providing it’s data sorting and analytic and bidding products to its clients, and therefore is attempting to become part of every stage of the marketing decision making and spending stage, and to demonstrate better performance by using its software.
The Investment Case
This is an incredibly competitive industry with a huge addressable market given the rise of mobile and internet advertising that is growing unabated. The risks to Rocket Fuel’s (FUEL) position in this market is that collecting and sorting big data is increasingly becoming cheaper and more accessible meaning that many of it’s clients may soon be able to internalize these functions and tailor them to their own needs.
The other massive red-flag on the horizon is any changes by the behemoth of the tech sector, Google, to it’s third party cookie rules. There are murmurs around that the company is considering replacing them which would have devastating effects for Rocket Fuel as it relies on these silent observers of browsing habits to collect the data that is the foundation for it’s business.
Rocket Fuel is a well-performed company on the NASDAQ that had a debut to match its lofty name. It’s continued success as a business will depend on it’s ability to grow both it’s client base and revenue by providing an attractive service that improves marketing efficiency by tailoring solutions for each client. However, significant risks exist in terms of replacement and substitution regarding its products and services, so investors should do their own research to thoroughly understand the risk-reward profile of the company before they proceed with an investment.