Millennial Media Circles The Wagons

"The market for digital media has proven, time and again, that those who position themselves for success early, particularly in the face of large markets, win outsized rewards." - Paul Palmieri, CEO, Millennial Media

The technology landscape is littered with companies engaged in mobile advertising exchanges. The larger headline grabbing entities like Google's (GOOG) AdMob, Apple's (AAPL) iAd, Facebook (FB), and now, up and comer Twitter (TWTR), (with its recently acquired MoPub), are fairly familiar to the investing public. Smaller combatants such as Mobclix (a division of Velti (VELT)), Nexage, Smaato, inMobi and Hipcricket (HIPP) are also in the mix. Not to be forgotten is Millennial Media (MM), a star-crossed IPO that has been uprooted because of a few backbreaking quarters.

The chart below is not a pretty picture, but just the same, I purchased shares at $6.60 due to a significant sell off courtesy of the current government crisis. As a quick background note, I've written about Millennial Media in a previous posting, stating that although I was interested in the security, I wouldn't pay anything more than $3-$4 a share. The well worn phrase by John Maynard Keynes comes into play here: "When the facts change, I change my mind.".

(Chart Source: Yahoo Finance)

The recent IPO of Rocket Fuel (FUEL), (which doubled on its first day of trading), altered my thinking on Millennial Media. With Millennial's recent acquisition of JumpTap, it now competes with Rocket Fuel in programmatic sales channels, otherwise known as "artificial-intelligence digital advertising solutions". There's a turf war brewing. Millennial Media is no longer a stand-alone advertising exchange.

The Old School Millennial Media

Back in early March, Millennial Media made a presentation at Barclays Internet Connect Conference. Although March was only a few short months ago, it's almost ancient history in the lightning fast mobile advertising world. Millennial Media CFO Michael Avon made this succinct description of his company which still holds true today:

We power the advertising for many of the app developers out there, over 39,000 apps. They download our software into their applications, and we run ads for them. That's 100% of our business.

Besides the promise of a mobile advertising market that's in ultra-growth mode, one of the reasons the stock got so hyped up during its IPO phase was the quality of clients. I don't think that attribute should be overlooked, and is a primary catalyst for investing in the company. Michael Avon again:

Today we reached over 400 million unique users on a monthly basis with about 160 million of those in the US. We work with 85 of the top 100 Ad Age advertisers. These are the largest advertisers in the world that is measured by Ad Age, big global advertisers, and we think that penetration of 85% of this top 100 is second to none, certainly in mobile and we think across digital.

Fast forward seven months and we still find Millennial Media in an enviable position in regards to clientele, but the company has changed significantly due to the JumpTap acquisition and various partnerships.

The New Wave

The onslaught of new business relationships have come fast and furious since early August. The first being a partnership with Adsmovil, the principal mobile ad network in Latin America and the U.S. Hispanic markets. This extends the Millennial Media platform into South America, Central America and Mexico. According to the press release: "With more than 400 million mobile users in Latin America, and smartphone penetration expected to reach almost 40 percent by 2016, according to eMarketer, Adsmovil will tap into Millennial Media’s first party data to enable brands to target these consumers on more than 45,000 sites and apps.".

Next, is the acquisition of JumpTap, and in reality is more like a merger of the two companies. It was mostly a stock deal where Millennial Media issued approximately 24.6 million new shares of common stock to the JumpTap shareholders for all of their equity. Here are some highlights presented by company executives during the last conference call:

• "Where Millennial is known as the leader in mobile brand advertising, Jumptap has more of a focus on the performance advertising side of the business. Additionally, Jumptap is the leader in mobile real-time bidding, or RTB, capabilities, reporting that they are seeing over 2 billion impressions per day to deliver app, download and other performance campaigns."
• "Jumptap is the second-largest independent mobile advertising platform in the U.S. behind Millennial Media and has been a respected player for many years in the performance segment of our business. According to IDC, Jumptap represented 10.7% of the U.S. mobile advertising network industry last year, compared to Millennial Media's 18%. Together, Millennial and Jumptap combined, would have accounted for 28.7% of the industry last year, about on par with Google's share, according to IDC."
• "By acquiring Jumptap, we expect to be able to accelerate our revenue growth rate from our standalone forecasts in 2014 and beyond. Advertisers, both brand and performance advertisers, are increasingly looking to buy through just a handful of select partners that can provide a full suite of digital advertising solutions. Today, Millennial is the key independent mobile partner for many large brands and agencies and for larger premium performance advertisers."

Finally, is the recent partnership with AppNexus. This relationship created the Millennial Media Exchange [MMX], the world’s largest premium mobile advertising exchange. The MMX provides advertisers and developers a unique opportunity to buy and sell on a real-time, programmatic basis with unique data at scale. I believe the operative word here is programmatic, which brings us back full circle to the recent Rocket Fuel IPO.

Rocket Fuel

This post is not intended to be an evaluation of the differences between Millennial Media and Rocket Fuel because it's not an apples to apples comparison. Nevertheless, they compete for some of the same advertising dollars in programmatic marketing solutions. As Rocket Fuel pioneers its way into mobile computing, and as Millennial Media expands its coverage to more varieties of connected devices, they will be at loggerheads.

According to Seeking Alpha, as they currently stand, Rocket Fuel has a market cap of $2 billion, Price/Sales of 14, Price/Book of 53, and cash/share of $.58. On the other hand, Millennial Media's market cap is $0.57 billion, Price/Sales of 2.67, Price/Book of 3.48, and cash/share of $1.51. There's a price dislocation here - Rocket Fuel is overvalued, and Millennial Media is undervalued. Irrational exuberance can go both ways. Neither companies are profitable at this juncture, but this is often the case with young growth companies.

Conclusion

You can chase a high flyer like Rocket Fuel, or invest in an organization like Millennial Media which may give you a more favorable outcome in the long run. With revenue growth clocking in at roughly 55% per year, you're buying the stock on the cheap, and giving yourself a decent margin of safety. The company appears to be looking out for long-term shareholder value, which is a plus. Although the next quarter may be bumpy because of the assimilation of JumpTap, I consider any drop in value a good buying opportunity. 2014 may very well be the year that mobile advertising equities take off, and Millennial Media is certainly in the hunt.

Mellanox Technologies: How Low Can It Go?

"We see Intel as the primary competition, and we're very concerned. For us, the game plan is to stay ahead of Intel. Today, we are leading by a generation." - Yakov Shulman, CFO, Mellanox Technologies

The semiconductor industry is rife with boom and bust cycles. There are anomalies like Intel (INTC) in the mid 80's to late 90's, or Qualcomm (QCOM) in the iPhone (AAPL) era, but for the most part, it's feast or famine. Exhibit A is a two year chart for Mellanox Technologies (MLNX), a fabless semiconductor company that designs, manufactures and sells high-performance interconnect products that help to facilitate data transmission between servers, storage and systems.

(Chart Source: Yahoo Finance)

There's an old Wall Street chestnut that says an investor shouldn't catch a falling knife, but after a drop from $120 to $34.50, I purchased some shares a shade under $35. If we rewind to 2102, the company earned $3.57/share when it shot up to $120. For 2013, that figure declined to an estimated consensus of $1.17, which accounts for the sell off. However, if we fast forward to 2014, average earnings/share estimate is for $2.22. At $35, that gives us a forward P/E of 16. I find that metric reasonable, and will continue to dollar cost average, even if the price keeps falling.

This really isn't just an article about Mellanox Technologies, but the brewing battle between Mellanox and Intel for supremacy in the data center. I'm betting on Mellanox. To buttress my investment thesis, the entirety of this article is helped by the most recent Mellanox Technologies 10-K, its last conference call, and the presentation at the Barclays Global Technology, Media and Telecommunications Conference.

A Brief Company Background

It's all about Big Data. Mellanox Technologies allows seamless integration between servers and the end users with their insatiable appetites for all sorts of information. It's the only game in town for 56 gigabit per second InfiniBand products. InfiniBand is an industry-standard architecture that provides specifications for high-performance interconnects. According to the annual report, these high-performance interconnect solutions remove bottlenecks in communications between compute and storage resources through fast transfer of data, latency reduction, and improved central processing utilization.

Although the majority of the company's revenues come from InfiniBand (which they've been shipping since 2001), it's also an early supplier of 40 Gigabit Ethernet to the market. This provides Mellanox with the opportunity to gain additional share in the Ethernet arena as users upgrade from one or 10 Gigabit to 40 Gigabit. Both technologies are crucial in the Cloud, and Mellanox is a one stop shopping place for the digerati looking to make their data centers run at mind boggling speeds.

As far as customers go, Oracle (ORCL) (which owns 10% of the company) put Mellanox on the map by exclusively using the organization's InfiniBand offerings. Other heavy hitters followed suit. The enclosed diagram gives you a detailed presentation of Mellanox clientele:

(Diagram Provided By Mellanox Technologies)

In regards to marketing, the company primarily sells to large server OEMs such as IBM (IBM) and Hewlett-Packard (HPQ). Both entities represented 35% of revenues in Q1, 2013. In aggregate, OEMs constitute approximately 90% if its sales, with the remaining 10% coming from distribution. Enough said.

The Ensuing Battle With Intel

Where semiconductors for wireless handsets are concerned, it's common knowledge in investing circles that Intel is behind the eight ball. They're also a generation behind in InfiniBand and Ethernet solutions for Big Data transfers. Nevertheless, they're a formidable opponent with deep pockets for R&D and acquisitions. Intel recently circled the wagons by purchasing four companies to compete head to head with Mellanox. CFO Yakov Shulman at the Barclays Global Technology, Media and Telecommunications Conference:

• "Our closest competition is Intel. Intel acquired 4 companies to compete with us. Intel acquired NetEffect for Ethernet, they acquired Fulcrum for Ethernet switching, they acquired QLogic InfiniBand assets, as well as Cray Interconnect."
• "To date, Intel offers 40 gig solution on InfiniBand side. We hear that they decided to skip 56 gigabit per second generation and will try to intercept us at 100 gig."
• "We expect to introduce our full end-to-end 100 gigabit solution sometime in 2014, 2015 time frame. We think that Intel is behind us. We estimate that they will launch their solution in 2015 time frame."
• "For us, it's a matter of execution. I think we have better technology, and if we execute well, we could take significant market share."

The Mellanox Counterpunch

As part of its plan to deliver the next generation of interconnect, with speeds of 100Gb/s in 2014, 2015 timeframe, Mellanox acquired Kotura and IPtronics. These acquisitions bring to Mellanox important technology capabilities for interconnect solutions at 100Gb/s and beyond. By owning the core competency and controlling all the building blocks of the interconnect solution, Mellanox is positioned to continue to lead the fast interconnect market and to serve the High Performance Computing, Web 2.0, cloud, storage, database and financial applications.

Here's the Cliff Notes sales pitch as paraphrased by CEO Eyal Waldman in the latest conference call:

But even when Intel comes with a 100 gig solution, Mellanox has so many sticky design wins, it will take some time for Intel to really become a viable competitor in those markets. If you look at multiple design wins Mellanox has with Oracle, Teradata (TDC), IBM, and EMC, when Intel comes with their solution, these customers will have to rewrite some of the code they created around Mellanox products, and Mellanox would have to qualify the code.

Valuations

Comparing Mellanox Technologies to Intel is no apples to apples comparison. Besides the technology, the only thing the two companies have in common is that they both greatly underperformed a roaring stock market in 2013. Year to date, Intel has moved from $21 to $23.70. If you screened for a Dog Of The Dow, you'd probably unearth Intel. Mellanox is a pure play on the semiconductor market for Data Centers. Intel is a behemoth, with tentacles that reach into many markets.

If you're an investor looking for fixed income, Intel may be a good bet for you. The dividend yield is 3.8%, but the P/E Ratio is 13, with projected earnings growing at a paltry 7.5% for the next 3 years. I've been through three market crashes: 1987, 2000 and the "Great Recession" of 2008-2009. Because of the instability at times in the market, I prefer my fixed income in CDs. However, your comfort zone may be different. That said, I think Intel's days as a growth company are over.

With Mellanox, earnings are projected to grow 100% in 2014. Wall Street is a forward looking mechanism, and October is when the smart money starts crunching numbers for the next calendar year. Although there are headwinds in the market like a possible government shutdown, I'm wagering that Mellanox technologies has stopped falling. The short float is 13.5%, and with the next conference call scheduled for mid October, I'm betting on a short squeeze. This is a good investment for the next year.

Medidata Solutions: Priced For Perfection

"Medidata is uniquely positioned at the intersection of life sciences and technology." - Tarek Sherif, CEO Medidata Solutions

The best of both worlds. That's the enviable position Medidata Solutions (MDSO) finds itself in as we enter the Fall of a blistering year in the stock market. Two sectors that have outperformed are Cloud Computing and Biotech. Medidata's flagship product Medidata Rave sits solidly in the center of these two arenas. It offers cloud based solutions in the clinical trial process for biotechnology companies, medical device manufacturers, and big pharma.

The company had its IPO in June 2009 at $14/share. It barely budged from its initial share offering for two years as investors slowly waded back into the stock market. Once earnings and revenues increased at a healthy pace, investors took notice, and elevated the share price from $16 to $100 in 24 months.

(Chart Source: Yahoo Finance)

At par value, the equity sports a trailing twelve month P/E Ratio of 121. Although earnings growth for 2013 is a healthy 33%, the consensus estimate on Wall Street drops to 17.5% for 2014 (which may be conservative). My contention is that Medidata Solutions is ahead of itself, and may be due for a significant haircut if the next quarter doesn't live up to lofty expectations, or guidance disappoints. After all, Wall Street is looking for next year's numbers now.

To make my point, the remainder of this article will be liberally paraphrasing and quoting from the company's annual report, most recent conference call, and its presentation at the Morgan Stanley Technology, Media & Telecom Conference.

The Company Near Term

The Pharmaceutical Industry spends spends $90 billion a year developing new drugs, and Medidata Solutions is the largest task provider of solutions to the life sciences companies. According to the CEO, in its core market, it has over 50% market share, and has achieved "critical mass" in terms of the kind of data it's collecting. The company's chief competitors are Oracle (ORCL), Perceptive Informatics, and Tableau Software (DATA).

The annual report states primary product Medidata Rave is built on industry standards, enabling interoperability with legacy and third-party applications throughout the development process. CEO Sherif gives his spin:

We focus on replacing paper-based, Excel-based, and legacy-based processes in drug development in actual clinical trials with a very innovative disruptive technology solution that helps them to both save money, and to drive down times in drug development.

The company's software has end-to-end support for Unicode characters, required to deliver multi-lingual studies, which enabled its globally positioned sales force to land a who's who of pharmaceutical juggernauts. Johnson & Johnson (JNJ), Roche and AstraZeneca (AZN) are clients of note. Medidata can also boast a laundry list of biotechnology all-stars on its roster. The company's five largest customers accounted for 29%, 31% and 43% of Medidata revenues in 2012, 2011 and 2010, respectively. However, in 2012 and 2011, no single customer accounted for 10% or more of total sales.

Medidata is taking market share from some of the incumbents, or the legacy solutions. Last year, it added 100 new customers. It has 363 customers currently. There are over 2,000 companies globally that develop drugs. So there's a wide open field for it to continue to add new names.

It has a subscription model in terms of customers having the right to use Medidata technology for a period of time. It drives volume in terms of the adoption of the technology solutions, it recognizes revenue on a ratable basis over the contracts short-time, and its strategy is to drive adoption of the company's technology through its infrastructure, which is highly scalable on a gross margin basis.

The applications are very sticky. Last year, its retention was in the high-90% range, and that's not even counting the up sell opportunity it has with those customers. Last quarter, the retention rate rose to 99%.

Although this gestalt of information is impressive, it still doesn't warrant a trailing P/E Ratio of 120. However, as experienced investors understand, you are paying for future earnings growth. Medidata Solutions executives believe they are at the right place at the right time to take advantage of the paradigm shift in drug discovery.

The Company Long Term

Although trends in pharmacology such as Personalized Medicine, which includes genomics and targeted therapeutics, will likely be catalysts going forward, it is the expansion of Medidata's core competency that will drive share price higher. Recently, the company broadened its platform dramatically, and now focuses across the entire drug development spectrum. So from conception of a clinical trial through to completion of that trial. Last quarter, non-Rave revenues increased 144% year-over-year.

CEO Sherif:

We are able to increase market share across multiple functions within a single customer. As we identify new customer needs, our cloud model makes it much faster and more efficient to develop and deploy new functionality and solutions, continuously broadening and improving our platform and therefore, expanding our revenue opportunities.

Medidata is helping to define the vertical cloud business model, and its power is evident in its financial results. Not only did it exceed its previously stated outlook for revenue and EBITDA, and saw cash flow from operations increase to record levels, but it also continued to lead its SaaS peers in profitability measures. Second quarter highlights included:

• Application services grew 36% year-over-year.
• 45% of existing clients purchased more than one product, up from 41% in the first quarter.
• Total revenues for the second quarter of 2013 were $68.1 million, an increase of $14.6 million, or 27%, compared with $53.5 million in 2012.
• Application services backlog for the remainder of the year as of June 30, 2013, increased to $110 million, up 38% over the comparable period a year ago.
• Total cash, cash equivalents and marketable securities were $140.4 million at the end of the second quarter, an increase of $26.5 million, or 23%, as compared with $113.9 million at the end of the second quarter 2012.
• Cash flow from operations was a record $26.2 million in the second quarter, up 361% year-over-year.

No question is was an outstanding quarter, and I realize sell side Wall Street analysts are giving Medidata premium pricing, but I still remain convinced the stock is overvalued.

Conclusion

Medidata Solution's short float is only 5.5%, so the smart money is betting the stock has room to run. It keeps ascending to new highs on a daily basis, so short sellers beware. That said, its price/sales is 11, price/book is 16 and cash/share is only $1.45. That seems expensive to me. Young growth companies plow a lot of their revenues back into SG&A [Selling, General and Administrative Expenses] and R&D, and therefore, don't make a dime. That's not the case with Medidata. It's an extremely profitable and well run company, even with an R&D budget that's 19% of revenues.

Many investors subscribe to the Efficient Market Hypothesis where prices reflect all publicly available information, and that prices instantly change to reflect new public information. I take a different approach and believe that investors aren't always rational. Although the rank and file at Medidata are doing a great job where the company is concerned, in my opinion, the stock isn't worth $100, not at this juncture. I wouldn't short it. Personally, I don't short individual stocks, and that's especially true in a bull market.

Bottom line is I'd like to own this equity, but not at the lofty valuation. My purchase price for Medidata Solutions is somewhere between $65-$75. Its 200 day moving average is $64, and I prefer to buy my holdings for bargain basement prices. Your investment style may be different, and this stock has a full head of steam. If you don't mind the macro issues that hover over the stock market, this a great choice for short-term momentum players.