Rocket Fuel's Fall From Grace May Be Temporary

"I expect programmatic to slow down in the same way people stopped trading on exchanges and went back to handing pieces of paper back and forth for selling stocks. The Pandora’s box is open..." - Rocket Fuel CFO Peter Barwick in an interview on AdExchager

Wall Street can be a fickle place. Two short months ago programmatic advertising company Rocket Fuel (FUEL) hit an all time intraday high of $72. This was on the heels of an IPO of $29/share in late September of last year. On the same day shares hit their apex, the company announced a five million share stock offering ahead of its March 19th lockup expiration. Traders didn't like the news, and the price has spiraled downward to roughly $46, a decrease of $36% in sixty days. Although it's hemorrhaging cash, Rocket Fuel is still growing close to 80% on a revenue basis, and may present long term investors a decent entry point at the current valuation.

Programmatic Advertising - A Secular Growth Story

Artificial Intelligence. Big Data. Machine Learning. Distributed Systems. Combine these ingredients, and you get a high octane recipe for an advertising platform know as programmatic (which includes real time bidding). Rather than focusing on data analysis by humans, it's a business practice that autonomously adapts and learns while solving multiple problems. In lay terms, it's where and when to feed that advertisement. John Henry versus the steam shovel - you know who won that battle.

Consider this:

eMarketer projects Real Time Bidding digital display ad spending in the US will account for 29.0% of total US digital display ad spending by 2017, or $9.03 billion. In 2013, it accounted for 19.0%, or $3.37 billion.

(Chart Source: eMarketer)

That eMarket extrapolation may prove to be conservative. It also doesn't take into consideration international sales, so the potential for profits increases. Although Rocket Fuel is primarily a domestic company, it's entrenched in Europe with regional offices in the United Kingdom, France, Germany and the Netherlands. It's also making a push into Japan. The company is one of the kingpins and a pioneer of programmatic advertising. It should benefit from the secular growth story of a market in its infancy.

Explosive Growth Since Launching

Most notable in the latest 10-K, released February 28th, is the 126% compound annual sales growth from 2011-1013. In the last earnings report, Rocket Fuel guided for full year 2014 of revenues between $420-$435 million. If we split the difference, that would give us approximate sales growth of 80% for this year. Yes, revenue growth is slowing, but still advancing at a compelling clip.

Drilling down with some specifics:

Rocket Fuel statistics	2011	2012	2013
Revenues in millions:	$44.7	$106.6	$240.6
Net Loss in millions:	$(4.3)	$(10.3)	$(20.9)
Active Customers:	266	536	1,224
R&D in millions:	$1.5	$4.9	$17.7

We're in a new paradigm shift where technology is concerned, and many young companies are coming public before profitability. That's certainly the case for Rocket Fuel, and may continue for the foreseeable future. If you want to invest in some of the exiting new tech pure-plays, you may have to forego earnings to get hyper-growth. Taking that into consideration with your risk/reward tolerance, the losses may be overlooked for awhile.

To accentuate the positive on Rocket Fuel, look no further than its impressive client base which doubled last year to 1,224. This includes 70 of the Advertising Age top 100 advertisers and over 50 of the Fortune 100. It has significant mindshare in an industry in its early innings. Take a look at some of the heavyweights Rocket Fuel services, a who's who in corporate culture:

(Chart Source: Rocket Fuel)

What bothered me most about the financial filings was the R&D expenditures. With only eleven patents, and $17.7 million being poured back into R&D, the company should be doing more to widen the moat, if indeed it does have one. Criteo (CRTO), Tremor Video (TRMR), and YuMe (YUME) are other digital advertising companies that have recently gone public, and will attempt to take market share from Rocket Fuel.

The Move Into Mobile

As smartphones, tablets, laptops, desktops and televisions become interconnected with the advent of technological advances such as seamless video streaming, advertisers want to reach as many devices as possible in one fell swoop. Rocket Fuel got ahead of the curve by launching a next generation mobile advertising suite in February. The suite integrates with 27 mobile ecosystem partners which includes Flurry, Factual, BlueKai, MoPub (TWTR), and Celtra. According to the company:

Mobile Real Time Bidding suppliers connect with Rocket Fuel's proprietary bid infrastructure to provide the broadest mobile reach across tablets and smartphones on all operating systems, and utilize all possible anonymous identification protocols, including cookies, device IDs, and statistical matching.

I believe one formidable opponent going forward is Millennial Media (MM), a small cap company with a mobile advertising exchange. Millennial Media is moving into programmatic with a recent acquisition of JumpTap. Although the two companies compete in the programmatic arena, they are entering the multi-channel universe from two different directions. Millennial Media is going from mobile to desktop, and Rocket Fuel is going from desktop to mobile.

Full disclosure, I own shares of both Millennial Media and Rocket Fuel. Why own shares of both companies? I really don't know which organization will prevail, and because both are relatively inexpensive on a Price/Sales metric, I've got two horses in the race, at least for the next few quarters. However, Millennial Media is a turnaround play, and potential investors should be aware of this. For more information on Millennial Media, my recent article can give you the low down.

Some Rocket Fuel Valuations

Rocket Fuel is currently unprofitable because it's increasing headcount, and acquiring data centers to increase product improvement. As demonstrated earlier, sales are increasing at an impressive clip with mobile comprising 19% of revenues for Q4 2013. As supplied by Yahoo Finance and the annual report:

• Total Debt - $26.8 million as of December 31st
• Cash and cash equivalents - As of December 31, 2013 were $113.9 million. Rocket Fuel received net proceeds from its IPO of $103.3 million during 2013. Subsequently in February 2014, Rocket Fuel received net proceeds from its follow-on offering of $116.5 million.
• Price/Sales (trailing twelve months) - 6.86
• Market Cap - $1.59 billion
• Price/Book (most recent quarter) - 10.8

At roughly 5X 2014 sales, and a significant total addressable market, I took a flier on Rocket Fuel at $46. Eighty percent revenue growth is an opportunity that doesn't come up too often. You're never sure if you've reached the bottom of a sell-off in an equity, but if Rocket Fuel can continue to execute, it should be able to outpace the overall market in the next year.

Datawatch: Twenty Feet From Stardom

"What we lack is visibility in the market." - Michael Morrison, CEO Datawatch

If you go by equity appreciation, then the turnaround strategy at Datawatch (DWCH) has been a phenomenal success. The stock shot up from $12.40 to $38.70 in about six months beginning in May of 2013, but has come down to the $30 range in the last quarter. Much of this price propulsion can be attributed to two primary catalysts - the froth in the "big data" analytic sector which still exists today, and the acquisition of Panopticon back in June. At the time of the acquisition, Panopticon was the leading real-time Visual Discovery vendor, a direct competitor with Tableau Software (DATA).

Some Background

Datawatch was founded in 1985, and can boast a client base that includes 99 of the Fortune 100, and 495 of the S&P 500 companies. The company's "heritage" or "legacy" technology is best described by Alex Woodie of Datanami:

Prior to its acquisition of Panopticon, Datawatch's strength lay in the area of processing semi-structured and unstructured data. Its flagship Monarch offering gave customers the capability to ingest all types of data and documents--including reports in plain text or PDF formats--create a model based on the metadata contained in those reports, and yield more structured data as output.

That technology was suitable for 20th century analytics, but real-time visualization is becoming a business norm with the advent of on-the-fly data mining. Tableau Software, Splunk (SPLK) and Qlik Technologies (QLIK) have been market leaders the past few years. Enter Panopticon.

Panopticon: The Tail That Wags The Dog

Although the purchase of Panopticon could be considered a tuck-in acquisition (an all-stock transaction of approximately $31.4 million), it was a critical step in the transformation of Datawatch which began in 2011 when CEO Michael Morrison took over the helm. According to the company, this marriage created the only vendor in the analytics market that can access and transform any variety of data, and deliver data in real-time. It was no coincidence the stock heated up like a microwave oven after the merger was made public.

In addition to technology, Panopticon added 75 customers to Datawatch’s existing customer base, including Bank of America (BAC), Citigroup (C), Credit Suisse (CS), Amgen (AMGN), Novartis (NVS), Vodafone (VOD), and Shell (RDS-A). OEM relationships with SAP (SAP) and Thompson Reuters also ensued. Based on the new clients that were folded into the Datawatch family, you can see the company is highly levered to some vertical markets like the financials. Alliances with Qlik, Accenture (ACN), and Deloitte also came with the package.

Although Qlik can be seen as a competitor in some instances, both companies share a lot of the same customers. The Qlik product is used for very different purposes than what the Panopticon technology is utilized for. The same can be said for Splunk. Fast-forward five months to November of 2013, and Datawatch announced an alliance with Splunk. Like Qlik, Splunk offers some of the same services Datawatch does, especially in data mining. However, it's a separate set of circumstances for Tableau Software.

As expressed by the CEO at during the acquisition announcement:

I believe that this particular transaction will certainly bring Datawatch more in line with what you might see from a Tableau, in terms of applications and capabilities. So I would certainly see us on their radar, probably more frequently than you would have in the past.

Battle lines are being drawn in data visualization. Although Datawatch purportedly has the lead in technology, Tableau is a much larger rival with new iterations of its software scheduled to be released in the Q2 2014, and early 2015.

The "Land and Expand" Strategy

In the 2013 Q4 Conference Call, Chief Marketing Officer Ben Plummer discussed the company's "land and expand" strategy. Datawatch is attacking the market by focusing on its legacy customer base with a big emphasis on specialties they excel in. Most notably real-time data analytics. A big push into the Asia-Pacific region is also on the docket. There isn't as much competition in this geographic sector with Tableau, Qlik Tech, or Tibco's Spotfire (TIBX). However, Europe and the United States are still extremely important markets.

A recent partnership with IBM (IBM), may help Datawatch in the ever expanding data mining and analytic market globally. As explained by CEO Morrison:

We entered into an agreement with IBM, where IBM will resell our Datawatch solutions for report mining in analytics against documents stored in IBM Enterprise Content Management systems. While we have had an informal relationship with IBM for years, this is the first time that IBM has agreed to put our solution on their price list and resell it.

Although the big data visualization market is a drop in the bucket to a behemoth like IBM, it's a big deal for a smaller company like Datawatch. Additional boots on the ground with the pedigree of the Big Blue sales force can only be beneficial to the bottom line.

In the 2014 Q1 Conference Call, it was stated that customers initially landed include, HSBC (HSBC), Standard Chartered Bank (STAN.L), and Memorial Healthcare. Customers where the company expanded more significantly on initial purchases of its visual data discovery solution included Citigroup, Invesco (IVZ), and Deutsche Bank (DB). The alliance with IBM was well underway in Q1, but no specifics as to which accounts they participated in.

As a side note, this tack is not to be confused with Tableau's "land and expand" strategy. I don't know if there is a bit of copycatting going on here, but the implementation for both companies is quite different. Tableau Software's approach is to offer its product for free as a teaser, hook the individual customer with the plug-and-play attributes, then go after the department when word of mouth steamrolls the purchasing process.

Playing Catch-Up With Tableau Software

In the "big data" technology and services market, IDC projects a 27% compound annual growth rate to $32.4 billion through 2017. This is about six times the growth rate of the overall information and communications technology market. With Datawatch and Tableau Software the two primary pure-plays in data visualization, there is probably room for both companies. Nevertheless, even with the acquisition of Panopticon, Datawatch was late to the party although they've got a rock solid position in certain vertical markets like financials.

Here are some paraphrased statements by CEO Morrison in the most recent earnings presentation:

• I would characterize what we've done in Q4 and Q1 as primimg the pump.
• We've got a lot of work to do to get on the radar screen.
• The offering we have in visual data discovery is very much like Tableau.

Although the Datawatch visualization product may be very much like Tableau's, Tableau Software was founded over ten years ago at Stanford University, so they've got a big head start.

In 2010, Tableau's revenues were approximately $34 million. That's more than what Datawatch sold three years later in 2013 ($30.3 million in fiscal 2013, a 16% increase over the $26 million in sales for 2012). Last year, Tableau's revenues were $232.5 million, growth of 82% over 2012. Some of the Datawatch sales were derived from the data mining part of the business, so it's not an apples to apples comparison. Taking that into consideration, it makes the task of catching Tableau more daunting. Datawatch has a huge gap to overcome.

The Bottom Line

The documentary film Twenty Feet From Stardom focuses on the backup singers on some of the most prolific rock and roll songs back in the 60's and 70's. Although mega talented, the movie's subjects just never made it to the big time. I believe this may be the same fate for Datawatch. It will be successful, but as a niche player in data visualization with strengths in some vertical markets. With the advent of Twitter (TWTR) and other forms of social media, word of mouth spreads very quickly on an international basis where business, politics and pop culture are concerned. Tableau has too big of a jump on the smaller company.

In closing, for turnaround technology company, the stock is not grossly overvalued like its rival Tableau Software. According to the most recent statistics on Yahoo Finance, it has a market cap of $256.44 million (it should be noted the company issued a stock offering after the market cap figure was released, but it's in the ballpark). Price/Sales for the trailing twelve months is 7.94. Price/Book for the most recent quarter is 5.28. Although the turnaround strategy has been a success to this point, it doesn't guarantee it will continue to gain traction. My opinion is that the entire big data analytic sector is overvalued, and if there is sector rotation, or a market correction, this stock will fall like its peers.

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This concludes a three part series on big data mining and analytic pure plays. Previous postings focusing on Splunk and Tableau Software were utilized for statistics in this article.

Tableau Software: When You're Hot, You're Hot

"Big Data" visualization pure-play Tableau Software's (DATA) "land and expand" business model has paid of in spades. It's a grassroots level strategy that often nets individual customers via free trials, then spreads across an organization's departments, divisions and geographies via word-of-mouth. According to the most recent conference call, the overall average initial order size has consistently been under $10,000. That same document reported Tableau closing 179 transactions greater than $100,000 for the quarter.

It was a blowout quarter in a blowout year for the Seattle based company. Wall Street has taken notice, and propelled the shares to over $90 after coming public at $31 just nine months prior. Shares reached $100 in recent a market upswing, but have sold off 10% in the past few weeks. However, it still remains one of Wall Street's glamour stocks.

With 2014 revenues guidance at $320-$325 million, and a lofty market cap just north of five billion dollars, my contention is that the equity is way over its skis for long term investors. Ninety dollars a share is just not sustainable. Nevertheless, the market can stay irrational longer than you can stay solvent, or so the old chestnut goes, so short sellers beware. I believe there are some catalysts for short term traders that may push shares even higher because the data analytic sub-sector is in vogue at this juncture.

Catalyst #1: Gartner Positions Tableau as a Leader in Business Intelligence

For the second year running, Gartner selected Tableau as a leader in its Magic Quadrant for business intelligence and data analytic platforms.

(Chart Source: Gartner)

If you examine the chart closely, you can see Tableau outpacing competitors such as Microsoft (MSFT), Qlik Technologies (QLIK), Tibco Software (TIBX), Oracle (ORCL), and IBM (IBM). According to Gartner, "It is very likely that 2014 will be a critical year in which the task of making 'hard types of analysis easy' for an expanded set of users will continue to dominate Business Intelligence market requirements.". Tableau's easy-to-use, plug and play software makes it a hit for end-users as the company invents and commercializes cutting edge advances in analytics. You can see one reason why Wall Street put shares prices at a premium. Traders and investors both like technology leaders, and Tableau certainly fits the bill.

Catalyst #2: The Partnership with Splunk

Earlier this month, Tableau and Splunk (SPLK) announced a strategic technology alliance. Although both companies reside in the data intelligence sub-sector, they're more or less complimentary technologies. Splunk leads the market in enabling organizations to collect, index and make searchable unstructured data. Tableau Software's products allow you to visualize that data in the form of charts and graphs.

To give an example, it's almost like the 2002 movie Minority Report, where police officers can predict murders before they happen. Big banks of computers crunch numbers that will predict the probability of a murder - where and when it's going to happen. That's the analytic side of the equation, where Splunk fits in. The holograms the police use to massage and interpret the data is a function of what Tableau does. Like a souped up Excel spreadsheet.

Tableau's mission is to help people see and understand data. Coupled with Splunk's large pool of the flotsam and jetsam of the machine age, additional sales should be generated for both companies. More than 7,000 enterprises in 90 countries use Splunk software to deepen business and customer understanding. Combine that with the 17,000 client base of Tableau, and you've got a potent mixture. However, both equities have come a long way in a short period of time. Like Tableau, Splunk has more than doubled in value this past year.

Catalyst #3: The Blowout Quarter

The numbers were outstanding:

• Tableau posted a record fourth quarter delivering total revenue of $81.5 million. Wall Street consensus had been modeling for $67.1 million. This represented a 95% increase over the prior year Q4.
• For the full year, it posted total revenues of $232.5 million, growth of 82% over 2012.
• The company achieved a compound annual growth rate of 89% over the past three years.
• International sales were 22% of total revenues. CEO Christian Chabot believes that the international business operations are what the domestic side of the business was like three or four years ago. There is plenty of room for overseas expansion.

As CFO Tom Walker stated during the conference call: "In any given year, we generate the majority of our sales from customers previously acquired.". The land and expand strategy again. Google (GOOG), PepsiCo (PEP), Capital One (COF), Delta Airlines (DAL), Deutsche Telekom, Ford (F), and Bristol-Myers Squibb (BMY) are just some of the companies under the Tableau umbrella. Compound this with the partnership with Splunk, and you've got a real growth story on your hands.

Going Forward

According to management, two things in regards to prospective enterprise clients happened last year that helped contribute to the dramatic increase in sales. One was the success of the IPO which introduced Tableau to a larger base of customers. The second is the release of Tableau 8.1 in November. This provided users with more advanced analytic capabilities by integrating with the open source statistics program R. Tableau is scheduled to release version 8.2 in the second quarter, and Tableau version 9 in the first half of 2015. These releases could also be catalysts for increased sales.

Here's where it gets dicey. Although quarter-to-quarter can be lumpy (Q1 is notoriously know for being light), the company has projected annual revenue growth of approximately 40% at the high end for 2014. That's a far cry from the 82% in 2013. Granted, the company can't grow at almost 90% forever, and this 40% projection could be a low ball figure, but that's a significant drop. As far as earnings go, there are none for 2014. The company is expecting non-GAAP operating losses of between $15 and $20 million for next year. This is because the company is investing heavily in R&D, and increasing headcount. In addition, management expects gross margins to decrease because of the additional expenditures.

Conclusion

This is a pricey stock. Yahoo Finance valuation statistics show:

• Price/Sales (trailing twelve months) of 23.34.
• Price/Book (most recent quarter) of 22.18.
• Total Cash Per Share (most recent quarter) is $4.15.
• Enterprise Value/Revenue (trailing twelve months) is 22.70.
• Short % of Float (as of March 11th, 2014) is 3.7%, as reported by The Wall Street Journal.

It should be noted that the short float decreased by almost 10% right after the earnings release because a short squeeze ensued. This stock is in play, but you're paying top dollar for it.

If you like to trade based on momentum, this could be a stock for you. It sits in the intersection of two red hot sectors, big data analytic pure plays and recent IPO's. That said, if you're like me and prefer growth at a reasonable price, better buying opportunities may be on the horizon. For instance, the company will be issuing additional shares of stock, which may put pressure on the inflated price. Macro headwinds are always in the picture, too.

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Sections of this article were aided by Tableau Software's recently released 10-K (.pdf file). It is the second in a series of "big data" mining and analytic pure plays posts. The first one featuring Splunk can be found here.

Splunk: Expensive By Most Metrics

Mining and analyzing unstructured machine data is a business practice that's here to stay. Last year was a huge year for many small cap "Big Data" stocks. Splunk (SPLK), Tableau Software (DATA), and Datawatch (DWCH) doubled, and even tripled in value. Much larger competitors in the business intelligence arena didn't fare so well. EMC (EMC), IBM (IBM), Oracle (ORCL), and SAP (SAP) had lackluster performances in a year that the S&P 500 was up nearly 30%. That said, the smaller data analytic securities appear to be overvalued, most notably Splunk.

The Company

Splunk is the undisputed leader in operational intelligence of the data analytic pure plays. Its software detects gridlock in a corporation's networks, and can massage data in innovative ways to improve organizational performance. CEO Godfrey Sullivan talks about two examples in the most recent conference call:

One of our large customers is analyzing the position and performance of fuel tankers on some of the world's most dangerous roads, proactively monitoring for speeding, illegal fuel transfers, breakdowns and hijackings. Additionally, a large U.S. government contractor is using us to analyze its sensor data from industrial facilities to prevent dangerous accidents in handling hazardous materials.

To paraphrase the most recent 10-K, the core of Splunk's software is a proprietary machine data engine that enables dynamic schema creation on the fly. End users can run queries without having to understand the structure of the data. Splunk compliments the core product with additional content in the form of apps or add-ons that can be deployed on top of the main data engine. It doesn't require customization, long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications. It works like a browser, much like Google's (GOOG) Chrome.

Last quarter, Splunk added 500 new customers, upping the total to 7,000 worldwide. This includes roughly 60 of the Fortune 100. Although this is a significant penetration of the upper echelon in business, the statistic is somewhat misleading. Those 60 companies don't encompass the entire organization, but may represent just a department or two for each specific entity. Nevertheless, Splunk is making inroads with its disruptive technology.

If this is just the dawn of the machine data revolution, there is plenty of room for growth. For instance, the company's year-over-year quarterly revenue has grown by over 50% in each of the past four quarters, as reported by Investor's Business Daily. Although this growth may not be sustainable, it may still continue at an above average rate, at least compared to the competition like an IBM.

In reading the prepared remarks in the conference call, you come away impressed by the new and upcoming revenue streams created by Splunk partnerships. These relationships include:

• A recently launched joint go-to-market initiative with Cisco (CSCO), focused on simplifying and accelerating threat visibility with the Cisco Identity Services Engine.
• Conducting an upcoming 20 city road show with Palo Alto Networks (PANW), one of Splunk's top security channel partners.
• Because of Hunk, which is the Splunk analytic for Hadoop, the company has established partnerships with privately held Hortonworks, Cloudera, and MapR.
• A partnership with Amazon (AMZN), where Hunk will be offered on the Amazon Web Services marketplace.
• Post earnings release, there was also a partnership announced with Tableau Software. The combination of the Splunk and Tableau services have limited overlap because the technologies compliment each other.

In order to stay ahead of the technology curve, Splunk spends a considerable amount of money on R&D, $41.9 million in fiscal 2013, almost double the $23.6 million spent in 2012. Although fiscal 2014 R&D expenditures won't be released until early April, Splunk has a history of pouring money back into the company for future business development. In addition, what it can't create in-house, it goes out and gets. BugSense was bought in Q3 to enable direct access to data from mobile devices into Splunk. In Q4, the company purchased Cloudmeter so clients can capture data directly from their networks.

Valuation

Splunk had a tremendous Q4 reporting revenue of $99.9 million. Full year fiscal 2014 sales were $302 million, up 52% year-over-year. Although earnings per share for the quarter equaled $0.03, its full year non-GAAP net loss was $3.1 million, or $0.03 loss per share based on a share count of 105 million. The company will probably continue to incur losses, or, break even as it plows more money into R&D, acquisitions, and expanding headcount. For example, employees grew by 300 for the full year, making the total 1,000 under the Splunk umbrella.

For fiscal 2015 (the current calendar year), the company provided guidance of $400 million in revenue. In Q1, sales projections are for $78-$80 million, with an operating margin of minus 8%-10%. I believe that it can be safely stated that a young public company like Splunk should not be valued on an EPS basis because it's investing considerable amounts for growth. It probably won't be profitable for awhile, and if it does get into the black, net profits will be negligible. However, Price/Sales can be utilized as a barometer as to how expensive the equity is.

Utilizing Yahoo Finance statistics, we can observe that the Price/Sales for the trailing twelve months is 32. That's extremely expensive for a company that is guiding revenue growth of roughly 33% for the full fiscal year. Price/Book for the most recent quarter is 12.6. Another generous metric. The market cap is a whopping 9.8 billion. The short float as of February 14th is 3.1%, which may have trended lower since the stock has pulled back significantly the last week. Its intraday high was $106 on February 28th, but has sold off this past week to $88. Quite a drop if you were riding the momentum.

Conclusion

My personal preference in investing is growth at a reasonable price. At this juncture, Splunk doesn't fit the bill, although you may make money with the stock going forward. Consensus opinion calls for a $105 price for Splunk during the next twelve months. Many analysts believe it's a "market perform", which means it will trade in conjunction with the overall indexes. The high price estimate is for $122, the low comes in at $78. Depending on who you follow, you can probably still make a profit with Splunk, but the easy money has been made. It rallied from $28 to it's current price of $88 in 15 months.

It is of my opinion that the overall indexes are backing and filling right now, and could continue to move sideways for the next quarter. In addition, some market pockets such as biotechnology, 2013 IPO's, and the data mining pure plays have made huge runs, and could be ripe for a sector rotation. Geopolitical issues are always a headwind, especially with the Russian invasion of Crimea we are currently experiencing. Combine those opinions with the fact Splunk's revenue growth may be slowing based on the overall expansion of the company, you've got yourself a perfect storm for obtaining shares at a reduced rate.

Immersion: Significant Market Share In Haptic Technology

The majority of information in this article was obtained from the most recent Immersion (IMMR) conference call and 10-K, which was released on February 27th.

Haptic technology is built into smartphones, gaming systems, and cars to create vibrations so a user feels sensations when interacting with the computer screen. A Research and Markets Corporation report projects the global haptic touchscreen market is expected to grow at a CAGR of 41% from 2013 to 2018. The report also states that Immersion is the major haptic solution provider, and covers about 95% of the overall market. Smaller rivals based on market share are Finland's Senseg and SMK Electronics.

I originally covered the organization in December of 2012. My thesis in the article was that the company showed much promise based on the burgeoning haptic market, but that it was a risky stock because of its small market capitalization and history of poor price performance. After signing a multiyear licensing agreement with Samsung (SSNLF) in March of 2013, the stock took off, rising from $6 to $18. Now that the stock has dropped into the $11 range, I've taken a position in Immersion, although it's still a risky bet. 2013 revenues were a very small $47.5 million, 97.2% of which was derived from royalty and licensing.

That multiyear deal with Samsung was a coup for Immersion. Samsung accounted for approximately 47% of Immersion's total revenues for the year ended December 31, 2013, up from roughly 24% of total sales for 2012. Although you always want to have Apple (AAPL) as a customer, Google's (GOOG) Android operating system (where Samsung is a significant player), will account for 78.9% of smartphone market share in 2014. Apple comes up short with a projected 14.9% piece of the pie. However, a fat contract with Apple would certainly be a feather in the company's cap.

Even if a lucrative Apple contract can't be obtained, globally positioned mobile OEM's are solidly in the picture. According to CEO Vic Viegas in the conference call:

In 2013, Immersion achieved key milestones that have established the foundation for future growth in the immediate and long-term. These milestones include extending existing licenses, and securing additional new licenses with key mobile OEMs, including Samsung in Korea, Sharp in Japan, and Xiaomi in China.

Although Immersion has experienced lumpy quarters in regards to revenues, on a year-over year basis, they're in growth mode. 2014 and 2015 should be particularly good years for the company, especially in the smartphone market. Sixty-six percent of Immersion's 2013 sales were derived from smartphones. Further breakdown of revenues are: gaming 26%, medical 7%, and 6% from automobile.

Sony (SNE) utilizes Immersion TouchSense technology in the PlayStation 4 in the gaming sector. In the automobile arena, CEO Viegas elaborates: "Cadillac (GM), Aston Martin, Opel and Acura bring the very first haptically enhanced automotive touch surfaces to market, signaling a bright future in which haptics plays an essential role in bringing safety and usability to the next generation of automotive user interfaces.". Although these two areas of expertise are a smaller part of the revenue stream than smartphones, you can see where the adoption is in the incubation stage. Especially with automotive. Nevertheless, it demonstrates how things are moving forward.

Most, if not all technology firms have patent infringement problems. With 1,500 haptic patents to its name, litigations ensue for Immersion. In 2013, litigation expenses were $5 million. That's a tidy sum for a small company. Management states that figure will decrease by a couple million dollars in 2014. The most notable case is with HTC (HTCKF), an OEM with 6.7% smartphone market share in the United States as reported by comScore. This trial is slated to begin in March of 2015. A favorable outcome in the trial for Immersion could goose equity value next year, above and beyond the projected growth for the company.

Significant Statistics

For a small company with a market capitalization of $342 million, Immersion seems set for the future. It has no debt and a cash reserve of $71 million. That's impressive for an organization that had revenues of about $48 million for 2013. Looking forward, the company expects revenue to be in a range of $54 million to $62 million for the current year. That reflects a growth of 14% to 31% over 2013 based primarily in gains in the gaming and mobile sectors.

At roughly $12/share, the equity trades very close to the 50 day and 200 day moving averages of $11.63 and $12.32 respectively. As of January 31st, it had a short float of just 1.9% with 72% of the shares held by institutions. Consensus twelve month price projection is $16.33, so you can make money on this stock, if you can stomach the volatility.

Some Accounting Notes

If you look at the quote page for Immersion on Yahoo Finance, you'll notice the trailing twelve month P/E ratio is 8.7 and EPS is $1.37. Those are misleading statistics. This is because net income for Q4 2013 included an income tax benefit of $36.8 million, or $1.24 per diluted common share, resulting primarily from the release of a tax valuation allowance relating to net deferred tax assets. Coupled with that, those results reflect the impact of a change in accounting methods for Immersion beginning in that same quarter.

According to the annual report:

Under the new method of accounting, external patent-related costs are expensed as incurred, and classified as general and administrative expenses in our consolidated statement of operations consistent with the classification of internal legal costs associated with internally developed patents and trademarks. Costs associated with acquired patents and other intangible assets continue to be capitalized as incurred.

Addendum

In closing, it should be noted that Seeking Alpha contributor Paolo Gorgo was at the conference call representing his company Nortia Research. Mr. Gorgo has written a series of articles on Immersion which you may find valuable if you wish to drill deeper.

Synchronoss Technologies Transitions To The Cloud

IDC recently reported smartphone shipments topped one billion in 2013. That means big business for Synchronoss Technologies (SYNC), the company that activates smartphones for the AT&T (T) network. A big knock on Synchronoss in the past has been its over reliance on Ma Bell as a revenue source, but that's all changing as the company branches into its personal cloud platform. Think Apple's (AAPL) iCloud for multiple operating systems on a variety of mobile devices which include: automobiles, smart watches, fitness bands and tablets.

Verizon (VZ) was the first company to deploy the personal cloud platform. Telefonica (TEL), Vodafone (VOD), and AT&T are now in the early launching stages. In December of 2013, Synchronoss announced they had reached ten million subscribers for the personal cloud since early Summer. In the most recent conference call, CEO Steve Waldis sheds light on the enormity of the data the company manages in this undertaking:

As of today our cloud-platform solutions have more than 40 petabytes of storage under management. Now to put this in perspective, a single petabyte is equivalent to 20 million filing cabinets full of text, and 40 petabytes is roughly to equal 200 times all the data collected in the Library of Congress.

That 40 petabytes is just a small sample size. ABI Research predicts that today's 10 billion wirelessly connected devices will grow to 30 billion by 2020, so Synchronoss Technologies has a huge addressable market with "The Internet of Everything".

What sets Synchronoss apart is that they're operating system agnostic, and have teamed up with the major Tier 1 Telco companies to compete against the handset manufacturers for your data storage dollars. Companies like Apple with the iCloud want you to remain exclusively in their ecosystem. Synchronoss and the telecoms foresee that data backup is needed on multiple operating systems in today's complex world: Windows (MSFT), Android (GOOG), iOS, and technologies that haven't been invented yet.

Synchronoss will never be a household name because it's a white label solution for the telecom carriers that brand and promote their own initiatives. A good example is its new Integrated Life Platform, which enables seamless activation of next-generation connected devices. AT&T is the first carrier to deploy the technology with the AT&T Drive platform for connected cars. Tesla (TSLA) and AT&T recently announced a multi-year partnership to enable Tesla owners to utilize the connected car technology. Synchonoss wasn't mentioned in the press release, but it's the engine behind the scenes.

According to Nick Lazzaro, EVP and president, North America, Synchronoss Technologies:

The platform provides mobile operators across the globe a tremendous opportunity to offer more shared data plans, while at the same time providing customers access to their content on a multitude of devices, including automobiles...

With this technology you can download iTunes playlists via a digital locker, as well as access automobile diagnostic information on any device as part of the overall shared data plan. To prepare for this new service and the increased cloud adoption, the company spent much of 2013 building out eight data centers in the United States and Europe.

Another new white label service at Synchronoss is WorkSpace, a cloud-based file, sync and share offering for small and medium sized businesses. This service provides employees with secure access to corporate data anytime, anywhere. They'll be going head-to-head with Box, Dropbox and Citrix Systems (CTXS) with WorkSpace, which is scheduled to be launched in early Q2 by Vodafone.

I can't emphasize enough that a bet on Synchronoss Technologies is also a bet on the telecom carriers. It's also important to note that with both WorkSpace and the Integrated Life Platform, the company is in the introductory stage, so revenues from both projects won't ramp up significantly until 2015. That said, the cloud business is booming. Although in Q4 the activation side of the business decreased to the lower double digits on a revenue basis, Cloud Services sales increased 75% year-over-year. Wall Street took notice and propelled the stock significantly higher after the latest conference call.

Guidance

After an impressive quarter, Synchronoss executives gave upbeat information on what to expect going forward in 2014:

• Cloud revenue growth guidance is 40% (cloud accounts for 40% of current sales, activation services the remainder 60%).
• Revenue projection is $415-$428 million, a year-over-year growth of roughly 20% at the midpoint.
• Margin guidance is 25%.
• Earnings per share is $1.60-$1.65.

Valuation

The following statistics are provided by Yahoo Finance:

• Trailing P/E Ratio 55.9.
• Trailing Twelve Month Enterprise Value/EBITDA 15.44.
• Trailing Twelve Month Price/Sales 3.65.
• Most Recent Quarter Price/Book 2.85.
• Short Float 28% (as of January 31st).

Additionally, if you take the current share price of $32.50 and an EPS of roughly $1.63 (as projected for the current year), we get a 2014 P/E ratio of 19. At a 20% growth rate, that equates to a PEG ratio of 1.

Conclusion

If you like growth at a reasonable price, then Synchronoss Technologies may be a nice addition to your portfolio. I've owned it for two years now, dollar cost averaging with my cost basis at $22. It's been a good investment for me, but the best is yet to come. However, buyer beware. It's still a small to mid cap stock with a market capitalization of $1.2 billion. It trades in a wide range. The 52 week high got up to $39, and the 52 week low was $24. Things have reverted to the mean.

Wall Street Lowers The Boom On Millennial Media

Millennial Media (MM) is solidly positioned at the center of two hyper-growth technology sectors, mobile advertising and programmatic buying of digital media. According to eMarketer, mobile search and display advertising is up 220% in North America since 2012, with projections for growth in 2014 at 50%. In addition, Magna Global research states international programmatic buying is slated to triple from $12 billion in 2013 to $33 billion by 2017.

With explosive growth in both areas of expertise, you'd think Millennial Media would be firing on all cylinders, but that's not the case. Although the company issued preliminary Q4 2013 results above expectations on January 27th to much fanfare, the stock got crushed when management issued tepid Q1 2014 guidance during the February 19th conference call. To give you an example of how bad the carnage is, the stock initially shot up from roughly $6.70 to $8.40 after Q4 earnings and revenues were made public. After a weak 20% revenue growth was issued during the conference call for Q1 2014, the stock crashed to under $6. That's a decrease of approximately 30%.

Many investors would salivate over a company growing at 20%, but when you consider the revenue projections in the overall mobile advertising sector, it comes up short. Granted the advertising business tends to be seasonal, with Q4 the strongest, but formidable competitors like Google (GOOG) and Facebook (FB) aren't experiencing this problem. To put it in perspective, Millennial Media's year-over-year sales growth for 2013 was 44%. Q1 will be half of that. This includes sales of programmatic buying. Programmatic rival Rocket Fuel (FUEL) just executed an excellent quarter, and shares appreciated in value. Millennial Media continues to tank.

Despite this negative commentary, I'm still long the stock for a variety of reasons. Most notably a change in upper management with a different skill set than company founder Paul Palmieri. Palmieri stepped down from the CEO position last month to concentrate on companies in the venture capital stage. To replace Palmieri, Millennial Media appointed Michael Barrett CEO, and included him as a member of its board of directors. Mr. Barrett's claim to fame was orchestrating the sale of programmatic supply side platform AdMeld to Google while CEO of the company in 2011.

What I found most interesting in this brief part of a long and impressive resumé, is that Mr. Barrett has already taken a small company and sold it to a larger acquirer. Although he recently stated in The Baltimore Business Journal that he is focused on building Millennial Media, not the sale of the company, it's good to know he's previously seen opportunity, and taken advantage of the situation. There are many large technology organizations such as Yahoo (YHOO) and Microsoft (MSFT) that need a mobile presence, and Millennial Media could be a nice tuck-in. However, that's speculation on my part.

According to the conference call, CEO Barrett and CFO Michael Avon anticipate dynamic synergies with the recent merger with JumpTap, the programmatic side of the business. These synergies probably won't come to fruition until the second half of the year. Six months is a long time in the mobile technology sector, which could put additional pressure on the shares. Even the announcement of two new board members did nothing to help the sell off.

Results in investing are based on the price you pay for a security. I originally bought Millennial Media four months ago at $6.60/share, so I'm down a little over 10% on my original investment. I purchased the equity based on potential growth in two explosive markets, and the fact it was very cheap in valuation metrics. Those discounted valuation metrics still remain the same, and are even better because the share price has decreased, and overall revenues have significantly increased. Let's look at some numbers.

The balance sheet remains very strong with $99.2 million in cash and equivalents. The market cap is $0.62 billion with no debt according to Seeking Alpha. Seeking Alpha also provides us with Price/Sales of 2.41 and Price/Book of 3.90. Very reasonable valuations for a company growing in the range of 20%. The new CEO wouldn't pinpoint the actual growth, but somewhere in the 20% range. Could be 21%. Could be 29%. Perhaps he is under promising to over deliver.

As far as pure play mobile advertising securities go, Millennial Media was an industry darling when it IPO'd about two years ago at roughly $13. It shot up into the high $20's on irrational IPO exuberance. This is because of the strong brand advertisers they have in the portfolio - 90 of the Ad Age top 100 marketers. Things have changed in two years. You didn't have Facebook and Twitter (TWTR) to contend with, although Millennial still maintains an impressive client base.

Millennial Media is not a widow an orphan stock. It crosses the tape at $5.90, and could go significantly lower if macro market conditions don't improve. The S&P 500 is trading near an all time high, and the brutal Winter may put pressure on overall GDP for the first quarter of 2014. If it drops down to $5.60, it's only a thirty cent loss, but on a percentage basis, that's five percent. It begins to add up. This is definitely a risk/reward situation. A lot of risk is involved with Millennial Media, but the rewards could be substantial. The consensus price for the company is $9, a roughly 33% gain if it hits that mark in the next year.