I Love the Risk/Reward on This Pure-Pay Mobile Ad Company

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When Facebook (FB), tanked after its IPO, naysayers thought the social media giant was down for the count. A year and a half later, the stock is trading at an all-time high. I think mobile ad specialist Millennial Media (MM) has an excellent chance at following the same path.

One key reason for Facebook's success is growth from mobile advertising. In the second quarter, mobile ads accounted for 41% of the company's revenue.

But, it's not just Facebook that's seeing growth in mobile. According to analysts at ZenithOptimedia, mobile advertising was worth $8.3 billion in 2012. By 2015, it's expected to skyrocket to $33.1 billion -- a nearly four-fold increase. Because of the rapid adoption of smartphones and tablets, mobile ads are expected to grow seven times faster than desktop Internet advertising.

Tech giants such as Google (GOOG) and Apple (AAPL) will grab the lion's share of this market. However, there's still plenty of room for the smaller players. Millennial looks like a company poised to take a significant bite from the mobile advertising pie.

Millennial is one of the few publicly traded, pure-play mobile ad stocks. VentureBeat, which focuses on innovative technology trends, describes Millennial as "the leading independent player in mobile outside of Google."

Millennial provides software tools for developers to profit from their apps. It also focuses on helping advertisers reach mobile users. Although the company was founded in 2006, it didn't go public until 2012. Since its IPO, its earnings per share (EPS) have hovered around breakeven.

However, with the recent acquisition of Jumptap, a privately held mobile ad company, analysts estimate that Millennial will control a significant share of this extremely fast-growing market. With increased sales should come increased profits.

From a technical standpoint, Millennial's stock can be compared to Facebook in that its IPO peak was followed by a dramatic drop.

While Facebook shares have reversed course, Millennial's have yet to do so. But the stock may be on the verge of a turnaround, due to strong growth projections in the mobile ad industry. Traders who buy now have the opportunity to make hefty returns with limited downside risk.

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As you can see from the chart above, since Millennial's $27.90 IPO peak, shares have been in a major downtrend, falling as low as $5.87 in April.

Bouncing off this bottom, shares steadily climbed over the summer, hitting a high of $10.48 in mid-July. The level represented resistance, marked first by the intersection of the major downtrend line, and second by a layer of support that was formed in the summer of 2012 and was ultimately breached.

Unable to break $10.48 resistance, shares sank in August, falling to support at $6.36. This support level was tested again in September, and so far, it has held.

Since September, shares have traded as high as $7.95. The major downtrend line intersects at about $8.50.

If the stock can successfully challenge resistance, marked by the intersection of the major downtrend line, near $8.50, shares could surge. The next key resistance after that is just above $10, which would represent more than 40% gains from current levels.

The strong support is backed by powerful fundamentals.

For the upcoming third quarter, scheduled to be reported Nov. 4, analysts project increased demand for mobile advertising will cause Millennial's revenue to increase 43% to $67.8 million from $47.4 million in the comparable year-earlier quarter.

With some of the world's largest advertising companies using Millennial's mobile ad development services, analysts estimate the company's full-year revenue will increase 56% to $278 million from $177.7 million last year.

The earnings outlook is also optimistic.

As Millennial expands its mobile capabilities through the Jumptap acquisition, analysts expect third-quarter earnings will double, hitting $0.04 per share from $0.02 per share in the year-ago quarter.

For the full 2013 year, analysts estimate earnings will climb to $0.05 per share from $0.01 per share last year. For 2014, the analysts that follow the company see EPS growing more than five-fold to $0.26 per share. Given that earnings growth is projected to be around 400% for both 2013 and 2014, the company is trading at an extremely reasonable 26.9 times 2014 earnings.

Since the stock has held support at $6.36 for several months, is backed by strong sales and revenue growth, and is reasonably valued from the standpoint of 2014 earnings projections, I plan to go long.

Risks to consider: Millennial is a small company compared to Google and Apple. A technological innovation from one of these giants could mean earnings estimates for 2014 will turn out to be overly optimistic. Still, because the shares are trading close to the stop-loss, there is limited downside risk but significant upside potential.

Recommended Trade Setup:

-- Buy MM at market price
-- Set stop-loss at $6.29, slightly below key support
-- Set initial price target at $10.29 -- above the downtrend line, but below key resistance at $10.48 -- for a potential 47% gain by late 2014

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