Will These Ad Tech Firms Rocket Higher?

After an ad tech IPO opened up over 100%, will the other recent ad tech IPOs now rocket higher? Last week, the developer of an automated decision-making platform focused on digital advertising named Rocket Fuel (NASDAQ: FUEL) had a fantastic day, suggesting that other ad tech stocks could finally perk up. Prior to this IPO surge, the whole sector had been seen as a major failure with disappointing offerings over and over.

Rocket Fuel was probably the catalyst for recent surges in sector stocks of Tremor Video (NYSE: TRMR) and Marin Software (NYSE: MRIN). Both stocks have traded horribly since recent IPOs, but the huge rally by Rocket Fuel might signal a major shift in sentiment in the sector.

While the transition from TV advertising to the digital age continues at a fast clip, the stocks of the mobile, social, and video ad tech firms have struggled recently due to fears of competition and concerns that Google will eventually control the sector. The growth rates remain very attractive in these individual stocks, but until the recent Rocket Fuel IPO the sector had been overlooked.

Surging demand
Most market analysis agrees that demand for all forms of digital advertising is going to explode over the next few years whether mobile, social, or video. The companies that can bridge that conversion will make huge gains for shareholders. Unfortunately, picking the ultimate winners will be difficult, but one potential winner could be Rocket Fuel based on recent results.

MAGNA Global forecasts that the real-time bidding, or RTB, segment of the market will explode from roughly $4 billion spent in 2012 to $16 billion by 2016. Consider this segment as allowing for the computers to determine the best price and ad for a given consumer based on past behaviors. The CAGR rate and the recent growth rates in excess of 100% is what drove the IPO of Rocket Fuel to double during the first day of trading. The other ad tech stocks are seeing more modest growth in the 30% range that hasn't attracted investors seeking the extremely fast growth companies. In addition, Rocket Fuel is involved in the intersection of key buzzwords of Artificial Intelligence and Big Data that likely grabbed the attention of investors.

Revenue acquisition management
Not all brands and associated advertising agencies are convinced of the RTB concept and prefer to let a firm such as Marin Software manage and optimize their digital investments across search, display, social, and mobile channels. The company reported 30% revenue growth in the second quarter and an impressive 61% gross margin that easily surpasses the 47% achieved by Rocket Fuel in its second quarter.

As digital advertising becomes more complex, Marin offers a solution that allows advertisers to manage across different platforms, including Google and Facebook, from one entry point. The cloud-based platform allows those advertisers to measure, manage, and optimize their advertising investments while also saving time and improving outcomes. Currently, the platform generates 90% of revenue from search, but mobile is quickly becoming an additional focus with the increased complexity due to fragmentation among devices and operating systems.

The company reached 584 active advertisers during its 2013 second quarter, compared to 487 in the same period last year. The solid growth and subdued stock price should attract more investors in the months ahead. Not to mention, the stock lock-up period from the IPO ended on September 18, providing less fears of massive insider dumping.

In-stream video expert
Tremor Video offers a different solution to advertisers with a focus on offering placement of ads during the streams of videos watched online whether via a desktop or mobile device. The company has seen a substantial increase in demand for in-stream ads, but also recently launched a bidding and buying feature available through its video advertising platform called VideoHub Connect. Even more interesting, the company has formed partnerships with video inventory suppliers such as DoubleClick AD Exchange, LiveRail, and SpotXchange. The ability to grab some of the huge growth in RTB should boost an already robust growth rate.

The recent second-quarter results showed a strong 41% growth rate as advertisers and brands continue to push forward with video ads that offer a higher level of interactivity with the consumer. Tremor generated a gross margin of 46.5% or roughly in line with Rocket Fuel.

Bottom line
All of the ad tech stocks continue to generate strong growth rates and improving margins. The stocks have all underperformed as public companies, but the recent Rocket Fuel IPO could reignite interest in the sector. Long-term investors can obtain most of these stocks at very reasonable multiples, although concerns linger regarding the ability to generate profits.

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The article Will These Ad Tech Firms Rocket Higher? originally appeared on Fool.com.

Mark Holder and Stone Fox Capital Advisors, LLC own shares of Marin Software and ROCKET FUEL INC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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