Winning AIM stock

Headquartered in Israel but with offices around the world, Tremor is a leader in Video and Connected TV advertising. Its platform helps clients, such as Amazon and Disney, “reach relevant audiences and publishers to maximize yield on their digital advertising inventory“. As one might suspect, the gradual recovery in economic conditions and business confidence over the last year or so has been a boon to the company.

This month’s results — covering trading in the first half of 2021 — showed a company in rude health. Revenue more than doubled to $152.4m. In addition to being completely organic, CEO Ofer Druker said that this growth was “one of the highest” across Tremor’s peer group. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rocketed a staggering 3,545% to $64.8m year-on-year.

Another reason for the share price rise is the recent listing on NASDAQ (home of tech titans such as Alphabet and Facebook). Having a joint listing in the US should allow is to raise more money in the future to help fund acquisitions as well as provide working capital. Almost $129m was raised from the IPO in June.

Can it continue?

Unsurprisingly, Tremor’s management is bullish on the company’s outlook. It now expects Q3 revenue (excluding traffic acquisition costs) of “at least” $75m and adjusted earnings of around $37m. However, this is dependent on no “major Covid-19-related setbacks that may cause economic conditions to deteriorate or otherwise significantly reduce advertiser demand“. To be fair, I think this would apply to most listed firms. 

But isn’t this encouraging guidance already reflected in the price? Well, 26 times earnings is what I’d need to pay for the stock right now. That’s high, although arguably not excessive compared to elsewhere in the market. Knowing that the company looks very financially secure helps takes the sting out (TRMR has zero debt and had $275.5m in cash at the start of July). I don’t mind paying up for stocks as long as they look sufficiently resilient. 

However, it’s worth me being aware of a few things. For one, the Tremor share price has had some very volatile days. Last Friday, for example, it was down 4%. In the past, it’s had a few days where it has climbed and fallen by double-digit percentages. A low ‘free float’ might be partly responsible.

While not a risk as such, it’s also worth stating that there’s no dividend stream. So, if I were hunting for income, I’d need to look elsewhere. 

Tempting buy

Tremor International is a fine example of how AIM stocks can provide incredible returns over a short period. And while buying one year ago would clearly have been a far better thing to do, I must say that I still like the look of the shares now.

As long as I maintain a diversified portfolio (somewhat mandatory for those fishing for winners in the junior market), I’d be comfortable picking up some TRMR when markets reopen tomorrow.

The volatile share price

Despite appearances, the sudden drops in Tremor’s share price do not appear to be caused by any immediate problems with the business. But rather from the firm’s US IPO. To raise additional capital, it listed itself on the US stock exchange in June in addition to its UK listing.  The process helped raise $128.6m. However, it also created a dilution effect that seems to be responsible for the volatility that month.

Jump ahead to last week, and the same thing happened. The underwriters of the US IPO have decided to execute their overallotment option. This is a special arrangement that allows underwriters to issue additional shares to those initially planned. And it only tends to happen if an IPO proves to be exceptionally popular among investors. This secondary offering has allowed Tremor to raise a further $19.3m, but its share price once again suffered another dilution effect.

What does the business do?

Seeing a sudden drop in a stock is never a pleasant sight when already invested in a business. But these often present some of the best times to buy shares for a lower price.  So what does Tremor actually do?

The firm is a provider of digital advertising technologies, specialising in data-driven video commercials. Its customers pay to access its various platforms that help design and place effective advertisements. But the real value stems from the analytics suite. Using these tools, companies can tailor their adverts to target specific audiences, resulting in significantly higher click and conversion rates.

It’s certainly not the only company in the space. However, it’s proven to be a powerful tool that over 5,000 businesses are relying on. That certainly sounds like a promising opportunity to me. But like all data-driven firms, Tremor has some regulatory hurdles on the horizon.

It’s no secret that online privacy is becoming a prominent issue in society. And as a result, new regulations are being introduced that limit the type and amount of data that can be collected. Naturally, that creates limitations for Tremor, whose services are highly dependent on data collection practices. Suppose new legislation prevents it from delivering its services, or even worse, it fails to comply with them? In that case, the Tremor share price could quickly plummet as customers flock to rival platforms.

Time to buy?

As promising as this business sounds, I’m personally not interested. Even with the recent drop in its share price, the valuation remains exceptionally high, with a price-to-earnings ratio of over 2,760! To me, this looks like the stock is mainly being driven by speculation rather than underlying fundamentals. Therefore, I’m keeping Tremor on my watchlist for now.

The TRMR share price outlook 

Tremor International is a global leader in advertising technologies. Its primary focus is video advertising and it works with some of the world’s largest publishers, brands and advertisers. 

Over the past 12 months, demand for online advertising has boomed, and Tremor has reaped the benefits. In its latest trading update, the firm announced that revenues in its fiscal first-quarter would range $55m-$60m. That is up from $32.1m a year earlier. 

Programmatic net advertising revenues are expected to grow 84-95% year-on-year. With its top line set to nearly double in the first quarter, management has forecast underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $25m-$28m for the period, up from last year’s figure of $0.5m.

I think these figures illustrate clearly why the TRMR share price has performed so well over the past year. I also think the group’s growth is only just getting started. 

Booming market

According to estimates, the global online advertising market is projected to grow at a compound annual rate of 21% to nearly $1trn by 2025. 

The company’s current revenue figures suggest turnover could total $240m for 2021. This implies the group has only a minuscule share of the global online advertising market. With this being the case, I think it could have the potential to double, or even triple, its market share over the next few years. 

Still, I think it’s unrealistic to claim that Tremor has the potential to double its revenues every year going forward. The company could achieve this goal, but it’s improbable.

Instead, I think it’s more reasonable to say the business’s revenues will grow at least in line with the market. That implies annual revenue growth of around 21%.

Of course, this is just a projection. Tremor may outperform or underperform these figures. There’s no way of telling.

Large risks

The most considerable risk the company faces is competition from larger American rivals. Advertising market giants such as Facebook could quickly overwhelm the business if it wanted to grab its share of a particular market. This is a challenge management is always going to have to deal with, so that’s something I’ll be keeping an eye on going forward.

Another risk the company may have to deal with includes potential regulations on the gathering and use of data, which many online advertising businesses rely on to serve ads to the correct customers.

Nevertheless, despite these significant risks, based on Tremor’s existing size and the potential for growth over the next few years, I believe its share price looks cheap at current levels. Therefore, I would buy the stock for my portfolio today as a long-term growth investment.

One specific piece of news lit a fire underneath the UK advertising and marketing company. And the share price shot up by over 25%.

But why did it jump so far so fast? It’s not exactly a household name, after all. Why the sudden optimism about the fortunes of this £300m market cap company?

Downturn

Tremor International is one of the 100 largest businesses on London’s AIM market. It shares that status with star names like Boohoo, ASOS, and Fevertree.

In June, the Tremor International share price fell sharply when the company said trading had been “severely impacted” by the pandemic.

Customers were taking an axe to their advertising budgets in a bid to save money. Tremor bosses added that it was “too early” to suggest an outlook for the company for the year.

Stock markets hate uncertainty. Even with the first Covid wave tailing off at the time, the disappointing result really did a number on the share price.

Tremor share price rises

Revenues for the first half of 2020 would be $131m to $135m, the company said in June. This figure was nearly 30% less than the market expected. This result also pointed to an underlying loss of up to $6m for the advertising firm.

But a trading update just put out on turned everything around. Suddenly the glass appears to be half-full, and not half-empty.

“Tremor continues to drive substantial customer momentum in the second half of the current financial year,” the company said in the market update. It added that its team had “demonstrat[ed] strong organic growth despite the impact of Covid-19“.

Revenue growth is now expected to be 37%-43% higher in H2 2020 than in H2 2019. That’s some turnaround. From the pessimism at the depths of Covid lockdowns to this? No wonder the Tremor International share price soared today.

Many other businesses are now also suggesting a faster than expected bounce-back to profitability. That’s based on the possibility that Covid-19 vaccines might allow a return to normal faster than expected. 

Expect the unexpected

But the news for the Tremor International share price was even more unforeseen. “Revenues generated across October and November were the highest in the company’s history,” today’s trading update said.

Clearly, traders and investors today now think that the Tremor International share price has been improperly undervalued.

The company, led by CEO Ofer Druker, added in its market guidance that trading for the year would be “significantly ahead” of the range outlined in an October 2020 trading statement.

Tremor said it expects revenues to be around $50m higher at $390m-$400m compared to the update in October. It also expects adjusted earnings at a whopping $20m higher that October’s guidance.

One thing I’ve learned from reading regulatory news updates every day? If a company says its earnings, revenues or profits are going to be “significantly” anything — up or down — there will be a big price movement.

And that’s what happened to the Tremor International share price today.

Integrated business

Tremor heavily utilises technology to deliver its ads. The company was previously listed as Taptica International until it rebranded in June 2019. It has three core business divisions: Tremor Video, Unruly and RhythmOne. It bought Unruly from Rupert Murdoch’s News Corp at the beginning of the year and acquired RhythmOne in April 2019. 

In January 2018, the Tremor share price peaked about £5 a share but has since been in decline. This past year has seen some share price volatility, and it’s now trading around £1.65. Tremor’s revenue for the first half of the year fell 5.8%, while its pre-tax losses increased by 790% from $3.3m to $29.4m.

Its interim results forecast is for Q3 EBITDA to be $11m and revenues to increase year-on-year. It’s reassuring for shareholders to read it’s returning to profitability. But with the pandemic raging on, I don’t think it’s a good time to buy the shares. Plus, Tremor’s price-to-earnings ratio is 39, which is high.

Potential lawsuits

In January 2018, US company AlmondNet asserted that RhythmOne’s online advertising system infringes 11 US Patents owned by the AlmondNet Group. A claim has never been filed and RhythmOne is now in a commercial agreement with AlmondNet’s affiliate, but the matter hasn’t been concluded. It could be a red flag that may affect Tremor’s future share price. Along with this, in June 2019, Uber Technologies filed a complaint in the US, against the firm when it was still known as Taptica, alleging fraud, negligence and unfair competition. The accusation dates back to 2014, but Tremor considers the claims to be without merit and is defending against them.

Personally, this stock is too risky for me and I’ve seen more enticing long-term investments elsewhere.

A rising share price

Mirriad Advertising (LSE:MIRI) is another AIM stock that recently reported its interim results. It uses its patented AI targeted ads to integrate seamlessly into the user experience. It’s had an exciting year, despite the pandemic, with revenue increasing by 109% to £897k, year-on-year. Over the past six-months Mirriad’s share price has risen 425%.

It recently launched on the OTC market in the US and is focusing on growing its revenues there. One area it’s particularly keen on is the music industry and aims to increase revenue through targeted advertising in music videos. 

With China’s commercial activity bouncing back, things look to be continuing well there too. Mirriad’s already halfway through a two-year exclusive agreement with Tencent, one of the largest online video platforms in China. Its technology integrates with Tencent’s videos to distribute branded content to its large audiences.

I like what I see in this company and the rising Mirriad share price shows I’m not alone. I’m particularly impressed by its Tencent collaboration and think it could be a good time to buy shares in this ambitious business. However, as an AIM-listed company, it still comes with the risk of share price volatility and lack of liquidity.

The company earns its living as an online marketing specialist providing targeted advertising for brands through video and other channels – all that stuff we want to ad-block to stop it ruining our online days, I guess!

Cheap as chips

But the valuation really does look cheap. With the share price at 130p as I write, the forward-looking earnings multiple for 2020 sits close to just 3.5 – I think it’s fair to say that the company is out of favour with investors and has been for some time. It seems that the recent change of name from Taptica International hasn’t helped sentiment.

And that’s a big problem because investor sentiment is likely to work against any investment we make in the company despite its apparent fundamentals. One of the challenges is that investors seem to find it hard to trust firms based abroad in places such as Israel.

Yet, I think it’s wise to be cautious. At the end of 2018, the former chief executive resigned after allegations of fraud at the previous company he headed. There’s no suggestion that Tremor has done anything wrong, but at the very least we need to question the firm’s recruitment procedures.

Meanwhile, today’s report reveals to us a flat outcome on revenue compared to the equivalent period a year ago and a reduction in net cash inflow of just over 8%. But that outcome masks a decline in a major part of the business due to a balancing three-month contribution from RhythmOne, which the company acquired in April.

In fairness, the directors reckon Tremor is “well-positioned” to deliver a stronger second half. But this morning’s further plunge in the share price suggests investors have been voting with their feet. On balance, I’m inclined to be one of them because there are so many other opportunities available on the stock market, so why take on the uncertainty here?

Getting exposure to the small-cap sector

In theory, I like the idea of investing in companies with smaller market capitalisations because they have room to grow and are sometimes capable of delivering stunning returns to their shareholders. But there’s no doubt that the small-cap arena is also packed with risk and we should choose our stocks carefully.

However, sometimes it’s easier to get exposure to the small-cap universe of shares by investing in low-cost index tracker funds and I like the look of the Vanguard Global Small-Cap Index Fund – Accumulation. The fund aims for long-term growth of capital by tracking the performance of a market-capitalisation-weighted index of small-cap companies in developed countries around the world.

There are holdings of around 4,386 companies in the fund, which gives us comprehensive diversification, and the ongoing charge is low at just 0.38%. I think tracking the global small-cap index is a great way to get exposure to smaller firms within a portfolio and I’d rather buy into the fund than invest in Tremor International shares.

Here in the UK, technology stars such as Rightmove and AVEVA may have grown more slowly, but shares in both companies have still doubled over the last five years.

Today, I want to look at two other UK-listed tech stocks for which many investors have big hopes. Could investing in either help you become an ISA millionaire?

I’d buy this cash machine

One of my top picks in the domestic technology sector is Moneysupermarket.com Group (LSE: MONY). The market-leading price comparison website needs no introduction. However, I suspect many website users don’t realise just how profitable this business is.

In 2018, it generated a return on capital employed of 50%. What this means is that the group’s operating profit of £108m represented 50% of the money tied up in the business. That’s an outstanding result, because it shows the firm is able to generate very high returns when it invests surplus cash in growth opportunities.

Management is currently spending some of this cash on developing a new generation of services. From what I can tell, these will provide higher levels of automated switching and tighten the relationship between the customer and Moneysupermarket.

I expect these changes to improve the firm’s ability to generate repeat income from customers — good news.

My view: Moneysupermarket.com shares have risen by more 25% in 2019. They now trade on 19 times forecast earnings, with a 4% dividend yield. In my view, this very profitable business is the kind of investment that could help you build a million-pound ISA. I’d keep buying.

Bargain buy or value trap?

My next stock is a more speculative choice. Taptica International (LSE: TAP) is an online marketing specialist that makes money by providing targeted advertising for brands through video and other channels.

Shares in the Israeli firm have fallen by about 55% over the last year. The majority of this decline has happened since December when former chief executive Hagai Tal resigned in connection with an alleged fraud at his previous company.

Although there’s no suggestion that anything’s wrong at Taptica, investors are understandably wary, given the group’s non-UK domicile and lack of leadership. Increasing uncertainty about the outlook for growth hasn’t helped either.

Today’s 2018 results do little to answer the questions faced by the firm. Revenue rose by 31% to $276.9m last year, while pre-tax profit rose by 57% to $27.2m.

The group ended the year with net cash of $54.4m and management reiterated plans to buyback $15m of shares, after the takeover of video advertising group RhythmOne has completed. Despite such strong figures, Taptica’s share price is only 2% higher at the time of writing.

What’s wrong?

RhythmOne was also hit by allegations of misconduct a few years ago and has struggled to recover. Although a profit is expected for 2019, it has reported a loss every year since 2015.

Taptica hopes to create a market-leading digital advertising business by combing its operations with those of RhythmOne.

My view: But shares in both firms currently trade on less than six times 2019 forecast earnings. This tells me the market is pricing in a lot of risk. That’s a view I share. So both Taptica International and RhythmOne are too speculative for me.

As well as announcing the above legal action against its CEO, Taptica’s December trading update also contained a warning. “Revenue below expectations due to the forgoing of some lower-margin sales,” the update reported, although it also told investors full-year EBITDA would be ahead of market expectations.

The group has since noted it closed the 2018 financial year “in line with management expectations,” and at the end of the year, the firm had net cash of $54.4m after the payment of dividends. 

Growing the business 

The City was expecting Taptica to report earnings growth of 98% for 2018. Growth was expected to slow in 2019, but now the company has announced it’s acquiring peer RhythmOne. Under the terms of the all-share deal, Taptica and RhythmOne “will combine to create a force to be reckoned with in the mobile video advertising industry.”

According to management, the enlarged group will be “one of the leading video advertising companies,” which should allow it to compete more effectively in the fast-growing space, particularly in the United States where the market is expected to grow from $17.9bn (2017) to $27bn by 2021. As part of the deal, Taptica will be acquiring RhythmOne’s cash balance of $18m. Immediately after the deal is closed, the new, larger enterprise plans to spend $15m buying back shares, returning capital to investors and offsetting some of the dilution from the all-share merger.

Bright future 

I’m quite excited about what the future holds for the post-merger Taptica. The company is already highly cash generative and is snowballing. By combining with its peer, the company should be able to achieve better profit margins and offer clients a better all-around deal, which should lead to enhanced growth. That can only be good news for shareholders.

However, right now it seems as if the market still doesn’t trust Taptica after December’s slip-up. The stock is currently trading at a forward earnings multiple of just 5, without taking into account the amount of cash on the balance sheet. 

According to my calculations, cash is worth around 59p per share, which gives a cash-adjusted forward P/E of just under 4, a discount of more than 50% to the rest of the media and publishing sector. 

With earnings growing at a double-digit rate, I think a multiple in the mid-teens would be more suitable for this business. With that being the case, I can see an upside of at least 100% or more from current levels for Taptica’s shares. 

In my opinion, that’s a risk-reward ratio worth buying.

Indeed, analysts believe WPP’s inability to compete with these giants will result in a 14% decline in earnings per share (EPS) over the next two years to 108p, from the 2017 high water mark of 126p per share.

Considering all of the above, it is no surprise that investors have turned their backs on the company over the past 12 months. Since the beginning of January 2017, shares in WPP have lost around a third of their value, that’s including dividends.

However, despite this poor performance, I think the company could be a great addition to your portfolio in 2019. 

The worst case 

Looking at the shares right now, it appears that there’s already plenty of bad news baked into the price.

At the time of writing, shares in this advertising and marketing conglomerate are changing hands for just 7.9 times forward earnings. Even though EPS are set to decline by 14% over the next two years, this multiple undervalues the company in my opinion. 

Personally, I don’t think the group’s fortunes will improve drastically any time soon, but now that management is taking action to restructure the business for the 21st century, I think it could only be a matter of time before earnings level out.

And if the company does prove to the market that a recovery is under way, I think the shares could rise substantially from current levels. 

Shares in WPP have historically traded at a mid-teens multiple, a return to this level could see them trading higher by around 50%. In the meantime, the stock supports a dividend yield of 7%.

Double your money 

Another advertising business that seems severely undervalued is Taptica International (LSE: TAP).

Unlike its larger peer, it is still growing. The City is forecasting EPS growth of 98% for fiscal 2018 and 5.1% for 2019. But despite this growth, the shares are dealing at a forward P/E of just 4.2.

To try and reassure the market about the group’s prospects, management recently initiated a share buyback. The company is currently in the process of spending $10m of its $42m cash pile to repurchase shares. With a market capitalisation of £108m at the time of writing, a $10m buyback implies Taptica is going to reduce the total number of outstanding shares by 7.4%, a sizeable reduction.

I think it is a desirable investment for 2019. Usually, companies growing EPS at a double-digit annual rate would command a P/E multiple of 12 or more. If shares in Taptica traded up to this level, I calculate the stock could be worth 460p, a gain of 178% from current levels. At the same time, the dividend yield is 3.3%, which in my opinion only adds to the investment case. 

In the worst case scenario, as with any investment, investors could suffer a 100% loss. However, with a possible gain of 178% or more on offer when we include dividends, I think the risk-reward ratio here is desirable.

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.