Fool’s “Small-cap Canadian stock is about to ‘catch on fire’ as it takes on The Trade Desk…”

What's being pitched by Motley Fool Canada?

By Travis Johnson, Stock Gumshoe, November 5, 2020

The last stock that Motley Fool Hidden Gems Canada teased turned out to be quite a success, despite my skepticism (that was Cargojet, which they talked up as the “Small-Cap Amazon of the North”)… so shall we look into another one?

Why not, right? It’s not like anyone’s reading my drivel this week anyway, not with everyone’s eyes glued to election results (if this keeps up, we’re all going to have the names of all the counties memorized in Georgia, Arizona and Pennsylvania).

This one I probably can’t be 100% certain about, since the clues are a bit light, but we’ll see what we can do… here’s how the Fool pitch from advisor Jim Gillies starts for this newsletter (which is “on sale” for C$199/yr):

“Insiders reveal one small-cap Canadian stock is about to “catch on fire” as it takes on The Trade Desk…

“When Motley Fool Canada first recommended The Trade Desk to our members in 2017, it was a newly debuted stock trading for roughly $50 a share… now it trades for $572 and the investors who listened are up a mind-boggling 1,018%!”

So that makes you sit up and pay attention, right? A 1,000% gain is worthy of a bit of excitement. I can’t confirm just when the Canadian arm of the Fool might have recommended The Trade Desk, though I do know that they’ve been using it in their teaser pitches this year as a “triple down” buy, and, of course, I’ve been covering TTD since the Gardner brothers at the Fool started teasing it for their Stock Advisor newsletter in the US (and I bought some shares myself) a little over three years ago. And it is up 900%+ since I bought my first shares, so I’d be delighted to find another such growth darling.

So what are the clues? Here’s what the ad says:

“… there’s a tiny Canadian small-cap stock that might be about to “catch on fire” as it takes on The Trade Desk….

“this company’s disruptive new innovation could do to advertising what Shopify has done to e-commerce and Robinhood to stock trading.”

And he says it’s “less than 1% the size of The Trade Desk,” in addition to being in at least a similar business… so what else? Do we get any other clues about how this small company “disrupts the world of advertising with its cutting-edge new technology?”

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Uh, not really. So… ready for the Thinkolator? Our handy machine narrowed it down quite a bit, but can’t give us 100% certainly like we usually provide… so we’ll have to call this a partial guess, but this is very likely AcuityAds (AT.TO, ACUIF), whose stock has been on a nearly exponential rocketship over the past few months as they talked up and then announced a new digital advertising platform called Illumin… which does indeed sound somewhat similar to the programmatic software/advertising data services provided by The Trade Desk. This answer is buttressed by the fact that the Fool had a video Q&A session on November 2 that includes some comments from their analysts on AcuityAds, around minute 38, confirming that it has been a recommendation of Motley Fool Hidden Gems Canada recently (with part of the thesis being that the valuation gap with The Trade Desk would close). So… not 100%, but pretty close.

AcuityAds is still less than 1% the size of The Trade Desk, even after this run (market cap about $220 million for AT, versus about $31 billion for TTD), so it is easier to imagine ludicrous growth from these lower levels… what does the business actually look like?

Well, from what I can tell they’re really leaning into this new Illumin service — and were having some substantial trouble building up the company before that. I don’t know why, but revenue plateaued in 2018 for a bit and, like a lot of advertising companies, is still lower this year than it was a year ago (down about 10%).

Here’s how the company describes itself in its investor presentation:

“AcuityAds enables programmatic advertising through the operation of an independent DSP (Demand Side Platform).

“The Companyโ€™s DSP has, at its core, an internally developed AI algorithm which helps generate strong Returns on Investment (ROI) for advertisers.

“The Company offers real-time customer ROI analysis to show valued-added results.

“The Company is reinventing the advertising technology space with a new & innovative platform, illuminTM, launching in October 2020.

“The Company has invested more than $110M to date in its technology.”

I’m not an advertiser or ad agency, so I don’t use these “demand side platforms” — I just know that The Trade Desk is the largest and has been the fastest growing of these… but it’s also still a relatively new piece of the ad business, and programmatic advertising (ad campaigns directed by data, essentially) is not nearly as dominant as it might someday become. There are tons of other private platforms as well, they’re all a bit different in specialty or focus and aren’t necessarily clearly comparable to Trade Desk or AcuityAds… and some like Magnite (MGNI, that’s the former Rubicon Project, now combined with Telaria) or Criteo (CRTO) are public, or like OneView part of a public company (OneView used to be called Dataxu, it’s now owned by Roku (ROKU)), but most, like Amobee, Choozle, StackAdapt or Centro’s Basis, are private and we don’t really know how big they are or how they compare to AcuityAds.

AcuityAds is expected to grow out of the trough of this down year, with analysts expecting revenue to get to C$126 million in 2021 and $141 million in $2022, though there are only a few analysts covering the company and it wouldn’t be shocking if they have trouble predicting any immediate success (or lack thereof) that Illumin might have in the marketplace. Those same analysts expect AcuityAds to remain profitable, with about eight cents in earnings per share this year (down from 11 last year), and 19 cents next year. So at that, it’s trading right now at only about 30X next year’s earnings. Certainly a lot cheaper than TTD, which is currently available at about 150X next year’s earnings estimates (and on the revenue front it’s far more dramatic, with TTD trading at 45X sales while AcuityAds is under 3X — though their accounting is also a bit different, since TTD doesn’t count revenue the same way, so if they were comparable AcuityAds would probably be at about 6X sales right now… still cheaper, but less so).

Why that valuation distinction? Part of it is “who gets the attention,” of course, since TTD’s Jeff Green is on CNBC with some regularity, and The Trade Desk has been widely followed for years as a high-profile growth stock, particularly benefitting from the increased investment in advertising for streaming television. But it’s probably not just investor awareness, even if a bit of that really helps (Echelon gave it a pretty high profile endorsement a couple months ago)….Partly it’s growth, an established company with proven growth and a solid customer base should always trade at a higher valuation than a much smaller upstart with a new product, whose growth is more uncertain — analysts expect TTD revenues to double over the next two years, while AcuityAds, much smaller, is expected to grow revenues by about 50% during that same period (again, the analysts could be wrong for either company — but they’re more likely to be way off for the smaller AcuityAds, good or bad).

It’s hard to invest in a stock that has risen 300% in a few months, but you can still argue that AcuityAds’ valuation is reasonable… to make that argument, however, you have to have some faith that their Illumin product will be taken up with some alacrity and be popular with ad buyers, rejuvenating their revenue growth and catching the attention of investors. I have no idea whether or not that will be the case or not, you really have to study the company and think about the industry and make some value judgements — just being an ad tech company is not enough, you have to have a good one that can retain customers and keep strong margins and grow. Some have had serious trouble with that over long periods of time, like Magnite and Criteo (Magnite trades at a similar multiple to AcuityAds, Criteo is far cheaper but very downtrodden after losing a lot of their core tracking abilities to Apple’s privacy blockade in recent years), some have excelled, like The Trade Desk. I don’t know where AcuityAds slots in among those near-peers, but it’s an interesting company if you’re looking for something to research… and even after going from $1 to $6 this year, it’s still true that it’s quite tiny and almost completely unknown among investors (though yes, we did have a reader asking about it last month). Really, if you invest in AcuityAds here you’re speculating that they’ll be able to sell their new Illumin product very effectively. I can’t say I have an opinion on that at the moment, but perhaps I’ll build one, given a bit more time.

I’m sure we have a few readers out there who have looked at this one, so if you’ve got some thoughts on AcuityAds we’d all be delighted to hear them… think it deserves a richer valuation? Is it a wait and see story while they launch their new product? Convinced of the potential and willing to bet on this one today? Let us know with a comment below. The last stock that Motley Fool Hidden Gems Canada teased turned out to be quite a success, despite my skepticism (that was Cargojet, which they talked up as the “Small-Cap Amazon of the North”)… so shall we look into another one?

Why not, right? It’s not like anyone’s reading my drivel this week anyway, not with everyone’s eyes glued to election results (if this keeps up, we’re all going to have the names of all the counties memorized in Georgia, Arizona and Pennsylvania).

This one I probably can’t be 100% certain about, since the clues are a bit light, but we’ll see what we can do… here’s how the Fool pitch from advisor Jim Gillies starts for this newsletter (which is “on sale” for C$199/yr):

“Insiders reveal one small-cap Canadian stock is about to “catch on fire” as it takes on The Trade Desk…

“When Motley Fool Canada first recommended The Trade Desk to our members in 2017, it was a newly debuted stock trading for roughly $50 a share… now it trades for $572 and the investors who listened are up a mind-boggling 1,018%!”

So that makes you sit up and pay attention, right? A 1,000% gain is worthy of a bit of excitement. I can’t confirm just when the Canadian arm of the Fool might have recommended The Trade Desk, though I do know that they’ve been using it in their teaser pitches this year as a “triple down” buy, and, of course, I’ve been covering TTD since the Gardner brothers at the Fool started teasing it for their Stock Advisor newsletter in the US (and I bought some shares myself) a little over three years ago. And it is up 900%+ since I bought my first shares, so I’d be delighted to find another such growth darling.

So what are the clues? Here’s what the ad says:

“… there’s a tiny Canadian small-cap stock that might be about to “catch on fire” as it takes on The Trade Desk….

“this company’s disruptive new innovation could do to advertising what Shopify has done to e-commerce and Robinhood to stock trading.”

And he says it’s “less than 1% the size of The Trade Desk,” in addition to being in at least a similar business… so what else? Do we get any other clues about how this small company “disrupts the world of advertising with its cutting-edge new technology?”

Uh, not really. So… ready for the Thinkolator? Our handy machine narrowed it down quite a bit, but can’t give us 100% certainly like we usually provide… so we’ll have to call this a partial guess, but this is very likely AcuityAds (AT.TO, ACUIF), whose stock has been on a nearly exponential rocketship over the past few months as they talked up and then announced a new digital advertising platform called Illumin… which does indeed sound somewhat similar to the programmatic software/advertising data services provided by The Trade Desk. This answer is buttressed by the fact that the Fool had a video Q&A session on November 2 that includes some comments from their analysts on AcuityAds, around minute 38, confirming that it has been a recommendation of Motley Fool Hidden Gems Canada recently (with part of the thesis being that the valuation gap with The Trade Desk would close). So… not 100%, but pretty close.

AcuityAds is still less than 1% the size of The Trade Desk, even after this run (market cap about $220 million for AT, versus about $31 billion for TTD), so it is easier to imagine ludicrous growth from these lower levels… what does the business actually look like?

Well, from what I can tell they’re really leaning into this new Illumin service — and were having some substantial trouble building up the company before that. I don’t know why, but revenue plateaued in 2018 for a bit and, like a lot of advertising companies, is still lower this year than it was a year ago (down about 10%).

Here’s how the company describes itself in its investor presentation:

“AcuityAds enables programmatic advertising through the operation of an independent DSP (Demand Side Platform).

“The Companyโ€™s DSP has, at its core, an internally developed AI algorithm which helps generate strong Returns on Investment (ROI) for advertisers.

“The Company offers real-time customer ROI analysis to show valued-added results.

“The Company is reinventing the advertising technology space with a new & innovative platform, illuminTM, launching in October 2020.

“The Company has invested more than $110M to date in its technology.”

I’m not an advertiser or ad agency, so I don’t use these “demand side platforms” — I just know that The Trade Desk is the largest and has been the fastest growing of these… but it’s also still a relatively new piece of the ad business, and programmatic advertising (ad campaigns directed by data, essentially) is not nearly as dominant as it might someday become. There are tons of other private platforms as well, they’re all a bit different in specialty or focus and aren’t necessarily clearly comparable to Trade Desk or AcuityAds… and some like Magnite (MGNI, that’s the former Rubicon Project, now combined with Telaria) or Criteo (CRTO) are public, or like OneView part of a public company (OneView used to be called Dataxu, it’s now owned by Roku (ROKU)), but most, like Amobee, Choozle, StackAdapt or Centro’s Basis, are private and we don’t really know how big they are or how they compare to AcuityAds.

AcuityAds is expected to grow out of the trough of this down year, with analysts expecting revenue to get to C$126 million in 2021 and $141 million in $2022, though there are only a few analysts covering the company and it wouldn’t be shocking if they have trouble predicting any immediate success (or lack thereof) that Illumin might have in the marketplace. Those same analysts expect AcuityAds to remain profitable, with about eight cents in earnings per share this year (down from 11 last year), and 19 cents next year. So at that, it’s trading right now at only about 30X next year’s earnings. Certainly a lot cheaper than TTD, which is currently available at about 150X next year’s earnings estimates (and on the revenue front it’s far more dramatic, with TTD trading at 45X sales while AcuityAds is under 3X — though their accounting is also a bit different, since TTD doesn’t count revenue the same way, so if they were comparable AcuityAds would probably be at about 6X sales right now… still cheaper, but less so).

Why that valuation distinction? Part of it is “who gets the attention,” of course, since TTD’s Jeff Green is on CNBC with some regularity, and The Trade Desk has been widely followed for years as a high-profile growth stock, particularly benefitting from the increased investment in advertising for streaming television. But it’s probably not just investor awareness, even if a bit of that really helps (Echelon gave it a pretty high profile endorsement a couple months ago)….Partly it’s growth, an established company with proven growth and a solid customer base should always trade at a higher valuation than a much smaller upstart with a new product, whose growth is more uncertain — analysts expect TTD revenues to double over the next two years, while AcuityAds, much smaller, is expected to grow revenues by about 50% during that same period (again, the analysts could be wrong for either company — but they’re more likely to be way off for the smaller AcuityAds, good or bad).

It’s hard to invest in a stock that has risen 300% in a few months, but you can still argue that AcuityAds’ valuation is reasonable… to make that argument, however, you have to have some faith that their Illumin product will be taken up with some alacrity and be popular with ad buyers, rejuvenating their revenue growth and catching the attention of investors. I have no idea whether or not that will be the case or not, you really have to study the company and think about the industry and make some value judgements — just being an ad tech company is not enough, you have to have a good one that can retain customers and keep strong margins and grow. Some have had serious trouble with that over long periods of time, like Magnite and Criteo (Magnite trades at a similar multiple to AcuityAds, Criteo is far cheaper but very downtrodden after losing a lot of their core tracking abilities to Apple’s privacy blockade in recent years), some have excelled, like The Trade Desk. I don’t know where AcuityAds slots in among those near-peers, but it’s an interesting company if you’re looking for something to research… and even after going from $1 to $6 this year, it’s still true that it’s quite tiny and almost completely unknown among investors (though yes, we did have a reader asking about it last month). Really, if you invest in AcuityAds here you’re speculating that they’ll be able to sell their new Illumin product very effectively. I can’t say I have an opinion on that at the moment, but perhaps I’ll build one, given a bit more time.

I’m sure we have a few readers out there who have looked at this one, so if you’ve got some thoughts on AcuityAds we’d all be delighted to hear them… think it deserves a richer valuation? Is it a wait and see story while they launch their new product? Convinced of the potential and willing to bet on this one today? Let us know with a comment below.

Disclosure: Of the companies mentioned above, I own shares of The Trade Desk, Roku and Amazon. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.


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35 Comments
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tanglewood
Irregular
November 5, 2020 4:18 pm

Travis will be taking the whole family out to dinner. Trade Desk is up almost 100 points after hours!

๐Ÿ‘ 588
bunion132
Irregular
November 5, 2020 5:49 pm
Reply to  tanglewood

I checked out TTD’s extended trading a few minutes ago. Wow, wow! That’ll be some dinner. Maybe Travis will give out doggie bags for Gumshoers that actually read today’s article TODAY instead of trying to memorize the counties in Georgia, Arizona and Pennsylvania?

๐Ÿ‘ 281
beachwind
Irregular
beachwind
November 6, 2020 1:29 pm

I look forward to your thoughts on TTD in the Friday file. After today, this is my first 3 bagger, but in less than a year off of a MF recommendation. I am starting to wonder if I should part with the stock or stay along for the ride.

๐Ÿ‘ 20
alejandraken
Irregular
alejandraken
November 8, 2020 12:33 pm

with presidential election ad spend at 2X 2016 id say TTD likely benefited from political advertising in general and that will show up in q4 earnings. I wonder how many customers acuity has? and how fast that number is growing?

๐Ÿ‘ 7
moonshot
Irregular
moonshot
November 5, 2020 4:38 pm

I have bought the AT.TO shares at $2.10 now at $6.24. I also have TTD shares – both from Motley Fool Canada. I am a vey happy and proud member.

๐Ÿ‘ 16173
moonshot
Irregular
moonshot
November 6, 2020 2:03 pm

Hi Travis, I’ve only been a member for a year. I pick the stocks that fit my investment plan. I don’t go by with their entire recommendations. So far the once that I’ve picked are performing very well. I have added my reviews.

You do better than MF though…thank you! it is most appreciated.

Last edited 17 days ago by moonshot
mike_d
Irregular
mike_d
November 5, 2020 4:47 pm