AcuityAds is an attractive takeout target, says Echelon Wealth

Echelon Wealth Partners analyst Rob Goff was well pleased with the latest quarterly results from digital advertising name AcuityAds (AcuityAds Stock Quote, Chart, News TSXV:AT).

In an update to clients on Wednesday, Goff reiterated his “Speculative Buy” rating and $3.80 price target, saying the pace of consolidation in the ad-tech space makes Acuity look like a prime candidate.

Acuity posted its fourth quarter and full year 2019 financials on Tuesday, featuring Q4 revenue up 17 per cent year-over-year to $38.5 million and EBITDA up 83.6 per cent year-over-year to $6.0 million. For the year, the company posted 70 per cent revenue growth to $119.1 million and EBITDA of $9.7 million.

“The Company performed above our expectations as we continued to see strong momentum in our business as well as higher gross margins attributable to our enhanced AI platform and lower costs resulting from tighter expense controls,” said CEO Tal Hayek in a press release.

Looking ahead, Hayek said Acuity’s new self-serve advertising automation platform, which should get its launch this summer, will “further propel AcuityAds’ growth, profitability and leadership position in the industry.”

On the quarter, Goff says Acuity’s top and bottom lines exceeded expectations, where he was calling for revenue and EBITDA of $34.8 million and $3.8 million and the consensus expectation was for $35.1 million and $4.8 million.

The analyst noted this represented not only the seventh consecutive quarter of positive EBITDA for AT but also the sixth consecutive quarter of significant outperformance against the consensus for Acuity, even
as consensus estimates progressively moved up with each quarter.

Following the results, Goff has raised his 2020 estimates, now calling for revenue of $132.0 million (was $130.2 million) and EBITDA of $15.5 million (was $13.3 million).

“Even with our upwards moves, we believe that our revenues leave the potential for positive revisions considering the revenue momentum on the quarter while EBITDA leaves upside considering gross margin gains and the full realization of the $4.0 million in annual savings estimated for efficiency moves taken but only partially realized in Q419,” Goff wrote.

The analyst argues that AT trades cheaply compared to industry rivals such as The Trade Desk, which is currently valued at 13.0x EV/Revenue and 46.5x EBITDA for 2020 compared to Acuity’s 0.7x and 6.3x, respectively.

“While The Trade Desk’s scale, capital flexibility, and execution warrant a premium, the valuation gap warrants consideration,” Goff said.

The analyst noted that the ad-tech industry underwent significant consolidation over recent months as industry players position themselves with reference to rising connected TV ad spending.

“The competition for data driven adverting is intensifying with the growth in digital video ads spending at 36 per cent of the total video and TV advertising for H119 from 34 per cent in 2017, as reported by Interactive Advertising Bureau,” said Goff.

“We continue to see AT as an attractive acquisition candidate considering the strength of its product/service (measured by its ramping traction), its current valuation where an industry acquirer would look for significant technology savings where the acquirer moved onto the AT platform and in light of the pace of consolidation,” he wrote.

As of publication date, Goff’s $3.80 target represented a projected 12-month return of 146.8 per cent.