AcuityAds’ dream run isn’t over, Echelon says

Momentum is building for AcuityAds (AcuityAds Stock Quote, Chart, News, Analysts, Financials TSX:AT), according to Echelon Capital Markets analyst Rob Goff, who just gave the stock a major target raise in an update to clients on Wednesday. Goff said growth in e-commerce should continue to bode well for programmatic advertising and thus for AcuityAds, which for the full 2020 returned a massive 943 per cent.

Toronto-headquartered AcuityAds provides real-time bidding solutions for digital advertising and operates a Demand Side Platform that allows large volumes of marketers and advertisers to run automated and fully customizable digital advertising campaigns.

The company gave an update on January 11 on the progress of its new advertising automation technology illumin, launched on October 1. AcuityAds said revenue attributable to illumin over the fourth quarter was above $1.5 million, which to management showed a stronger- and earlier-than-anticipated demand.

“While the Company had initially anticipated revenue from the platform to positively impact its overall performance by the second half of 2021, this timeline has been accelerated. Demand for the platform, both from clients that participated in the beta testing as well as clients new to the platform, has been greater than expected, with strong positive feedback,” Acuity said in a press release.

As a result, the company said its pipeline for the first quarter of 2021 is now larger than expected, showing that illumin “clearly fills a gap in the industry,” according to Tal Hayek, CEO and co-founder.

For his part, Goff pointed to not only the Q4 revenue from illumin but to AcuityAds’ being included in the 2020 AdExchanger Programmatic Power Players List for illumin as reasons to stay bullish on the name.

Goff said the two events “support the potential for large multi-million dollar contract wins and positive forecast considerations.”

“The industry recognition is significant as The Power Players List is a directory of 60 globally leading agencies, solutions providers, and industry partners. We believe illumin’s profile and service capabilities opens market opportunities for AT amongst large enterprise,” Goff wrote.

Goff said he’s staying with his 2021 forecasts for the time being, calling for $128.6 million in revenue and $20.8 million in adjusted EBITDA. For 2022, Goff expects a topline of $153.8 million and adjusted EBITDA of $28.3 million. For the upcoming fourth quarter 2020, the analyst is estimating revenue of $35.0 million and EBITDA of $6.0 million.

Goff pushed his target to $21.00 from $13.50 while keeping his “Speculative Buy” rating, with the target representing at press time a projected 12-month return of 23.0 per cent.

“Our previous PT seemed aggressive and was high on the street when we introduced it on December 14/20. Since that time, the shares have moved ahead 36.4 per cent pushing above $20 per share as the shares gained momentum around illumin and the shares were featured in Motley Fool where AT was noted as an undervalued peer to The Trade Desk,” Goff wrote.

As for the programmatic advertising market as a whole, Goff said a relatively flat set of revenue forecasts for the Q4 2020 likely means the loss of COVID-sensitive business (especially travel) in the range of 25 to 30 per cent have now been offset by growth in e-commerce-related sites.

“In this sense, programmatic advertising should gain an increasing consideration as a leveraged e-commerce investment. We note that eMarketer is forecasting digital ad spending to advance 1.7 per cent for 2020 with 2021 growth put at 21.1 per cent, surpassing the 25.3-per-cent gain in 2019. eMarketer forecasts that travel and automotive advertising will decline by 41.0 per cent and 18.2 per cent for 2020 with 2021 year-over-year gains of 15.3 per cent and 21.4 per cent, respectively,” Goff wrote.

As for catalysts for AT, Goff pointed to the potential marquee customer wins on the illumin platform, acquisitions and potential takeover speculation.

“The Company’s financial and technology momentum has clearly made it a more attractive acquisition candidate. Alternatively, we would expect potential acquisitions to be well received as the Company’s platform (in-house technology) would be expected to support immediate accretion or alternatively acquisitions could lever illumin to expand its total addressable market,” Goff said.

Goff also noted that Acuity has been discussing the potential for margin expansion once it hits the $200-million threshold in revenue, where the company feels that its infrastructure is currently operating at roughly 60-per-cent capacity and a move to $200 million would likely see margins move to between 20 and 25 per cent.

On the M&A front, Goff said, “We look for AT to acquire ad-tech companies with technology complementing its broader service ambitions on the illumin platform. We look for consistent margin expansion against net revenues as the existing cost structure is capable of servicing significantly higher revenues with sales commissions representing the largest variable expense.”