Taptica (LSE: TAP) is a specialist in-app mobile advertiser. It is a data-driven operation but, unlike Facebook, this is not based on personal information but on consumer habits. For example, after an app is downloaded, Taptica may look at what other apps people will go on to purchase. Taptica can then compile the data and use complex algorithms to help the right people see the right adverts.
If this seems very confusing to you then you are not alone: the share price recently fell from over 500p to under 280p in the aftermath of the Facebook scandal and the subsequent data protection regulations, despite Taptica not storing personal information. This uncertainty from investors has caused the share price to lag behind the growth and profits that the company has produced.
Results looking good
Taptica has tried to calm the nerves of investors since the Facebook scandal and, following a good set of results earlier this month, the share price seems to be gaining momentum. Revenue grew by 119% and profit by 126% in the first half of this year, although most of this was through the acquisition of an American company, Tremor Video. Some investors feared this was a bad move but these latest results show the competence of the management as Tremor is already generating good profits.
Consider this alternative
Growing tech companies in new sectors normally sell for a premium: take Blue Prism (LSE: PRSM). Despite being tempted, I chose not to invest last year because I didn’t think it justified its valuation. The price has since doubled and now has a market capitalisation of over £1.5 billion around 40x higher than last year’s revenue of £38.1 million and no profit in sight. Some may see this valuation as justified by its habit of regularly exceeding expectations, but I would not want to be holding this stock on the day that it ‘only’ meets expectations.
Comparatively, Taptica has a market cap of around £250 million, revenue of £220 million and a profit of £15.8 million. When you look at these two companies side by side, it is easy to see the extent that the stock market is driven by sentiment and how dangerous this could be if there is no margin of safety.
What is it worth?
Taptica has a forecast price-to-earnings (P/E) ratio of 9.5. Personally I would expect a growing company, generating a good profit, in a growing market, with lots of cash and no debt to have a P/E ratio of at least 15 which gives a share price of around 580p and is what it would probably be worth without the Facebook scandal.
I purchased Taptica after the fall in the share price and, while there have been a few bumps, investors’ trust finally seems to have returned. While many may be uncertain exactly what Taptica does, the management has demonstrated it is very capable of growing the company; therefore I expect Taptica’s share price has a lot of catching up to do.