AcuityAds has a 69 per cent upside, Paradigm Capital says

As businesses continue to transition their media spending over to programmatic ad buying, digital media company AcuityAds (AcuityAds Stock Quote, Chart, News: TSXV:AT) will be reaping the rewards, says analyst Kevin Krishnaratne of Paradigm Capital, who maintains his “Buy” recommendation and $2.25 12-month price target.

On Tuesday, AcuityAds reported its 2017 year end and fourth quarter financial results, with revenue down in Q4 to $15.1 million from $18.5 million in 2016. The full fiscal year results were better, showing total revenue of $58.5 million compared to $39.6 million in FY2016, a 48 per cent increase, and Adjusted EBITDA of $3.5 million, compared to Adj. EBITDA of $2.9 in 2016.

“Overall, 2017 was another growth year for AcuityAds where we achieved revenue growth of 48% to $58.5 million,” said Tal Hayek, CEO of AcuityAds, in a press release. “Despite the revenue challenges we experienced in EMEA, we are pleased with the strong growth from our US business units.”

The company’s Q4 self-service revenue came in lighter than expected, says Krishnaratne, who has lowered his estimates for 2018, in particular, dropping total revenue to $63.5 million from $70.6 million previously. But key acquisitions in 2017 of programmatic platform provider Visible Measures and supply side video platform ADman Interactive SL (closing yet to be completed) will make for a better 2018, he says.

“AcuityAds saw many positives in 2017, including the acquisition of Visible Measures, which gave AT greater exposure to Video, one of the highest growth channels in Advertising, while it also started to explore unique partnerships to drive gains in its Self-Service business, such as its deal with Newcap Radio,” said the analyst in a research note to clients on Thursday.

“Adman is an SSP that is expected to add $10 million in gross spending for the full year, at a margin of ~46 per cent and contributing EBITDA margin at 5 per cent. Structured with earnouts, the deal is a clever way for Acuity to assess the SSP side of the ad tech ecoysystem at an attracive price and likely serves as a template for other deals to come as 2018 progress,” says the analyst. “On top of M&A, we see value in Acuity’s underlying AI technology that it could leverage in other industries outside of Advertising. Such events could lead to incremental upside to our current target.”

The analyst $2.25 price target reflects a forward EV/Net Revenue multiple on CY18 estimates of ~2.5x and is based on applying a 4.0x multiple on Acuity’s Self-Service business and a 2.0x multiple on its Managed Service business, for a total value of $2.00 on Acuity Core, to which he adds another $0.25 to reflect the inclusion of Adman.

The $2.25 target represents a 69.2 per cent potential return on investment as of date of publication.

Disclosure: Cantech editor Nick Waddell owns shares of AcuityAds