The selloff of AcuityAds is an overreaction, Haywood says

After AcuityAds (TSXV:AT) this morning cut its revenue expectations for 2017, Haywood analyst Pardeep Sangha has lowered his price target on the stock. But the analyst says the sharp selloff in the company’s shares is largely unwarranted.

This morning, AcuityAds announced that due to cutting some self-serve customers in Europe, Middle East and Africa, losing a significant customer of recent acquisition 140 proof, and foreign exchange pressures would impact its 2017 topline significantly. Shares of AcuityAds tumbled on Monday as investors digested the news.

“We feel strongly that our actions this quarter demonstrate that management has taken a long-term view to creating and enhancing shareholder value,” said CEO Tal Hayek. “When we see any activity that does not meet our high standards, we move swiftly and without compromise. When we acquire, we are meticulously focused on deal structure to mitigate risk. Despite these adjustments to our revenue guidance, we remain more committed than ever to both our organic and non-organic growth strategy.”

Sangha explained the development and his reaction.

“Acuity has removed approx. 17 partners for conducting poor industry practices such as auto-playing video banner ads,” the analyst notes. “Management does not expect any further material reductions. The Company expects an approx. $10M revenue reduction for H2CY17 due to these removals and has implemented approx. $2M in annualized cost savings. We believe Acuity’s actions will benefit the Company in the long term and enhance the Company’s reputation of being a credible, trustworthy vendor.”

In a research update to clients today, Sangha maintained his “Buy” rating, but lowered his one-year price target on the stock from $7.00 to $4.25, implying a return of 93.2 per cent at the time of publication. The analyst think today’s selloff is a buying opportunity.

“We believe markets are overreacting as the Company’s shares have retreated 38% in today’s intraday pricing,” he says. “Acuity is currently trading at 1.4x EV/Revenue of our CY17 estimates, which is lower than its peer group average which trades at 3.8x EV/Revenue of consensus CY17 estimates. Our target price is based on an EV/Revenue multiple of 2.0x our CY18 forecast.”

Sangha thinks AcuityAds will post Adjusted EBITDA of $700,000 on revenue of $60.2-million in fiscal 2017. He expects those numbers will improve to EBITDA of $800,000 on a topline of $78.5-million the following year.