Monday, June 4, 2012

Doubling Down On Velti

It's sometimes difficult to make sense of irrational behavior, and I'm not referring to the 10% market correction we're experiencing. The market pullback is painful in the short term, but this is healthy for the indexes going forward, especially after a six month run-up. What I'm talking about is the current valuation of multinational mobile marketing operator Velti (VELT). Although the futuristic advertising agency is not slated to become profitable until the second half of the year, they've been hauled over the coals the last few weeks because receivables were deemed light by Wall Street during their last conference call.

When you look at Velti's numbers on Yahoo Finance, I don't think they look that bad. Average analysts' estimates for 2012 is $.73/share, and for 2013 it increases to $1.00/share. Velti lists at $6.75, which gives us P/E Ratios of 9 for this year and 6.75 going forward. This is very inexpensive for a stock that is slated to grow earnings at a 35% pace per year for the next half a decade. I'm not an outlier in my belief that this is an undervalued security. Here are some of the twelve month price targets of the analysts that cover Velti: Canaccord Genuity - $21, RBC Capital Markets - $19, Needham & Company - $20, and Jefferies & Company - $23.

In my last Velti posting, I gave a business description and discussed their brief trading history. The article touched on a lawsuit against Velti by Augme Technologies (AUGT.OB), and I really didn't go into it. This type of litigation is very common with technology companies, however, it has come to my attention that this lawsuit by Augme doesn't just target Velti, but also includes companies with deep pockets like Yahoo (YHOO) and AOL (AOL).

The suit alleges that Velti and other companies infringed on Augme's patents related to distributing targeted advertisements to mobile users on their ultraportable devices. Velti has five patents regarding online advertising, so Velti may counter, but this is just speculation.

I'm not suggesting this is a penny-ante scheme by Augme, but they are a very small player in the nascent viral communications industry where Velti has established a newfound global presence with their recent acquisition of CASEE, the largest mobile ad exchange and mobile ad network in China. Augme does the the majority of their business in the United States. The sun never sets on Velti with their international reach.

I actually think Augme Technologies would be a great acquisition target for Velti. Both companies do the complex backend processing to facilitate ads through the mobile Web, but Velti is a much, much larger company than Augme. Augme has the majority of the market share in the United States, but that's about as far as it goes. Europe, India, Brazil and China belong to Velti, and they are gaining ground in America. The economies of scale are against Augme, and as consolidation narrows down the field, they may get steamrolled by the competition.

One company that could be a suitor for either Augme Technologies or Velti is Facebook (FB). This idea didn't just pop into my head out of thin air, but came to me after reading a guest editorial Forbes piece by Velti's Chief Marketing Officer Krishna Subramanian. The article gives this industry insider's take on what Facebook should do to monetize their dominant mobile presence. Facebook is the most used app across both the Apple (AAPL) iOS and Google (GOOG) Android platforms.

Here's what Mr. Subramanian had to say right before the Facebook IPO: "Facebook knows it needs to succeed in mobile, and it is about to see its war chest swell by billions of dollars. Not much could stop them from simply partnering or buying up a highly successful mobile advertising company or platform to help create monetization success.".

Sounds like a business proposition.

My impression is that Velti would be a great partner with Facebook because they are both international organizations. Facebook is huge in both India and Brazil, and Velti has a presence in both countries. With Augme, Facebook would only be getting domestic exposure. Velti has that covered, too, with offices in San Francisco, New York and Atlanta.

Some companies just don't get this new paradigm shift to mobile and peer-to-peer advertising platforms. Facebook is one of them and they are the undisputed worldwide leader in social media. Go figure. I tip my hat to an organization like Ford (F) that is at the forefront of embracing the benefits of digital marketing. Not only do they effectively utilize Facebook, but they also teamed up with Velti to win the 2012 Mobile Merit Award of Excellence. The award is given to the best brand or agency in mobile marketing.

The advertising landscape is rapidly changing, and although traditional channels like television, radio and print are still an important part of a large-scale corporation's media mix, social and mobile should also be incorporated. An organization like Velti can make that happen.

Velti is not a new company, but it is a new public company, and they're experiencing some growing pains as they make headway mounting an offensive to increase their global footprint. My original stake in Velti was at $12/share, and I recently took another position at $6, making my average cost at approximately $9.50/share. As the gamblers so often say, "the only sure thing is that there is no sure thing", but my view is that with a sizable bet on Velti at $9.50, I'm going to make some money with this security in the next year or two.