AcuityAds has more upside still, Haywood says

AcuityAds (AcuityAds Stock Quote, Chart, News, Analysts, Financials TSX:AT) is seeing strong early adoption of its new platform, which is a good sign of things to come, says to Haywood Capital Markets analyst Neal Gilmer. In an update to clients on Tuesday, Gilmer reiterated his “Buy” rating for AT and boosted his target price from $10.00 to $19.00, representing a projected one-year return of ten per cent at the time of publication.

Digital advertising solutions company AcuityAds on Monday issued an update on the early days of its Illumin advertising automation platform, launched on October 1, 2020. The company said attributable revenue exceeded $1.5 million for the fourth quarter and demand for the platform both from clients that participated in the beta testing and clients new to the platform has been greater than expected, including strong positive feedback.

As a result, management has moved forward its timeline on getting a positive impact from Illumin, originally slated for the second half of 2021, noting that the higher-than-expected interest in Illumin has increased its pipeline for the first quarter 2021.

Company CEO and co-founder Tal Hayek said Illumin clearly fills a gap in the advertising industry and that there is no other solution on the market offering the same visibility and control of real-time advertising performance.

“While we did not expect illumin to generate its first million dollars in revenues in 2020, we are absolutely thrilled to have already appreciably exceeded this major benchmark, and we are actively ramping up the team to support demand from our customers,” said Hayek in a press release. “We believed that illumin would have a meaningful impact within the programmatic industry at large, yet we could not have anticipated the demand coming to fruition so quickly.”

Gilmer said the positive update from the company and the early adoption of Illumin de-risk his forecast and outlook on AcuityAds.

“While we aren’t revising our estimates at this time, we believe this supports our 28-per-cent revenue growth forecast in 2021 with a bias to the upside,” Gilmer said. “We will look for further outlook from the company with the release of its fourth quarter 2020 results. Our fundamental view remains quite positive, particularly supported by the advertising automation platform. However, it remains unclear if there will be any impact from the continued effect of COVID-19 on various industries.”

AcuityAds’ share price shot up over the back half of 2020, leaving the stock with a remarkable return of 943 per cent for the year. AT went from sub-$2.00 territory to over $20.00 by late December, although the stock has pulled back since.

Gilmer said AcuityAds’ underlying fundamentals continue to improve, which supports his overall positive outlook yet the analyst noted some volatility risk in the near-term which is common following such a strong run in the share price. Gilmer said a potential NASDAQ listing during the first half of this year would vastly increase the company’s potential investor base, which could be supportive of the share price over the H1/2021.

“In an increasingly digital world, advertisers are under strong pressure to spend marketing dollars more efficiently and receive measurable results,” Gilmer wrote. “While the market was disrupted by the pandemic, we expect the rebound to continue into Q4 and 2021. We believe the new self-serve platform Acuity has developed and expects to deploy later this year should generate interest that drives revenue growth in this segment.”

On a valuation and comparative basis, Gilmer pegs AT to be currently trading at 6.4x his 2022 EV/Revenue estimate and 6.2x consensus estimates, which compares to the average among US Ad Techs trading at 7.5x. The analyst noted Acuity continues to trade at a discount to the Trade Desk, a direct industry comparable trading at 26.5x EV/Revenue estimates, while Canadian software &service companies are trading at an average of 7.9x 2022 EV/Revenue estimates or 7.1x when excluding the high and low. Gilmer’s $19.00 target stems from a 7.0x EV/EBITDA multiple of his 2022 revenue estimate, discounted ten per cent.

By the numbers, Gilmer thinks AT will generate full 2020 revenue and adjusted EBITDA of $104.3 million and $14.1 million, respectively, 2021 revenue and adjusted EBITDA of $136.3 million and $21.7 million, respectively, and 2022 revenue and adjusted EBITDA of $156.1 million and $28.3 million, respectively.

As for potential catalysts, Gilmer pointed to a rebound in ad spend to normalized levels over the medium term, traction gained by Illumin in terms of sales and margins, additional acquisition announcements (which AcuityAds has historically utilized to drive growth, according to Gilmer) and improving profitability, with all of these catalysts potentially occurring over this calendar year.

Last month, AcuityAds closed on a $23-million bought deal offering including over-allotment of 3.28 million shares, with the company saying the net proceeds will be used to fund the company’s growth strategy including future acquisitions and for general corporate purposes.