Rocket Fuel: Only Taking Off
Last week, both Rocket Fuel and Millennial Media confirmed that the fourth quarter was a strong period for programmatic digital ads. While Millennial Media suggested the automotive sector might have pulled some revenue forward to the fourth quarter from the start of 2014, the general indication is that digital ads will increasingly move to programmatic platforms due to growing complexity.
Rocket Fuel aims to provide the right ad to the right person at the right time using big data and machine learning. These ads are delivered to customers in an automated, real-time process that learns from the results of the last ad and optimizes the performance. The fourth-quarter results again back up the benefits of this system with revenue surging more than 100% over last year. The results finish off a stellar four-year period where Rocket Fuel grew from virtually nothing to reach revenue of $240 million. For 2013, revenue growth surged 126%.
Huge market opportunity
Even with the stellar growth, Rocket Fuel is only a tiny fish in the massive ocean of advertising. According to the slide below from the recent Rocket Fuel presentation, the advertising market now reaches $490 billion in annual spending, with digital advertising still less than 10% of the total ad market. Even more important, Rocket Fuel is only a tiny fraction of the digital ad market, leaving tons of room for growth.
Likewise, Millennial Media recently reported that revenue surged more than 40% in 2013 to reach $342 million. Millennial recently merged with fellow mobile ad firm Jumptap in order to focus on the fast-growing programmatic segment. After several weak quarters, Millennial smashed expectations in the fourth quarter. In total, the mobile ad market is expected to reach $9.6 billion this year and skyrocket to more than $35 billion in 2017.
Fellow global leader Criteo S.A. is using machine-learning algorithms to improve digital display advertisements. The France-based ad tech firm saw revenue surge 63% during 2013 to reach more than $600 million for the year. Unlike the other firms in the sector, Criteo is actually profitable and generated free cash flow last year.
Complex tech favors programmatic
The recent growth of Rocket Fuel and the resurgence of Millennial Media places an emphasis on the shift in multi-channel advertising toward real-time bidding, or RTB, and programmatic exchanges. Rocket Fuel saw an exceptional 721% growth of mobile, social, and video ads, highlighting the shift in the market that gets more complex on a daily basis.
The issue with these new forms of advertising is that the area of focus constantly shifts within social sites and between mobile devices; a human optimizing a campaign can't possibly keep up. Is it better to serve the ad up to a user on an iOS phone looking at Facebook or the desktop looking at Pinterest?
As an example, Millennial Media estimates that it serves ads to 9,000 mobile device types over a profile base of 625 million users that need to be taken into account in marketing decisions. Rocket Fuel estimates that it can analyze, in real-time, more than 1,000 simultaneous ad campaigns with millions of attributes to make automated decisions on more than 450,000 bid requests per second.
The competitive advantage is clear in the numbers, with Rocket Fuel having a revenue retention rate of 168% in 2013. This means that customers in 2012 spent 68% more on its services during 2013. On top of that, gross margins surged roughly 600 basis points for the year, showing that Rocket Fuel was adding business at more profitable margins.
The key takeaway is that Rocket Fuel is only taking off and it will be years before the explosive growth of programmatic buying of digital ads slows down. Yet, despite the explosive growth and big-data tag, the stock only trades at around five times estimated revenue. Criteo surged to new highs recently, leaving hope that investors are becoming more comfortable with the stocks in the sector after some initial failures. Rocket Fuel could be the next to move higher.
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The article Rocket Fuel: Only Taking Off originally appeared on Fool.com.Mark Holder and Stone Fox Capital clients own shares of Millennial Media 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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