AcuityAds is a Top Pick for Q4, says Echelon Wealth

Echelon Wealth Partners analyst Rob Goff has come away impressed with the recent quarterly results from AcuityAds Holdings (AcuityAds Holdings Stock Quote, Chart, News TSX:AT).

In an update to clients on Monday, Goff reviewed AT’s third quarter results and called the stock his Top Pick for Q4 2019, saying that AcuityAds could be a takeout target.

Toronto-based AcuityAds, which provides real-time bidding solutions for the digital advertising space, released on Monday its financial results for the quarter ended September 30, 2019, coming in with total revenue up 55 per cent year-over-year to $26.9 million and adjusted EBITDA of $1.6 million compared to $1.1 million a year prior.

“We are very pleased with our results for the third quarter of 2019 as we continued to see significant growth in both revenue and EBITDA,” said CEO Tal Hayek in a press release. “Furthermore, I am pleased to report that the company has achieved our stated objective of generating positive adjusted net income in the quarter. Looking forward, we continue to see positive momentum going into Q4 and anticipate improving campaign performance, gross margins and overall profitability.”

AcuityAds’ third quarter numbers beat both the consensus and Goff’s forecasts. Goff was calling for revenue and EBITDA of $23.8 million and $1.1 million, respectively, and the Street expected $24.6 million and $1.2 million, respectively. The analyst noted that this was AcuityAds’ fifth consecutive quarter of year-over-year revenue growth and “significant outperformance” against the consensus even as consensus estimates moved up with each quarter.

“We retain our longstanding positive view towards AT’s programmatic platform. It was this view that prompted our decision to add AT to our Top Pick portfolio as of September 2018 when the shares were at $1.13. We noted at the time that we were taking the uncharacteristic move of adding a turnaround situation into our portfolio given the expectation that revenue traction was set to take on a new trajectory,” writes Goff.

Looking further, Goff pointed to the quarter’s expanded EBITDA margins that went to 5.9 per cent versus his estimate of 4.2 per cent. Comparatively, that margin was an improvement from the previous quarter’s 4.3 per cent but a decrease from the 6.4-per-cent EBITDA margin a year ago. Goff explained the decrease as due to an increasein R&D expenditures, notably with reference to a program upgrade to the company’s managed services algorithm.

On valuation, Goff compares AT to The Trade Desk, which trades at a higher multiple than AcuityAds due to its scale, capital flexibility and execution, all of which result in the premium multiple. Nevertheless, the analyst says that the multiple gap not only “warrants consideration” but that AcuityAds has the look of a takeout target.

“We note that a prospective acquirer such as The Trade Desk would realize substantial technology savings considering our $13.3 million forecast for AT’s 2019 R&D. We take the Company’s four most recent contract wins of $1.7 million, $3.3 million, $2.0 million and $7.0 million as evidence of AT’s ability to move up-market,” Goff says.

Goff is expecting AT to generate fiscal 2019 revenue and adjusted EBITDA of $115.4 million and $8.1 million, respectively, and fiscal 2020 revenue and adjusted EBITDA of $130.2 million and $13.4 million, respectively.

With the client update, the analyst is maintaining his “Speculative Buy” rating and $3.80 per share target price, which translates to a projected return of 208.9 per cent at press time.