Newly uplisted SITO Mobile Ltd. (SITO) shares recently broke to new highs above $6 on increasing volume
Shares have since pulled back below $5 light volume in last 2 days, creating an excellent entry point
Why we believe the strong uptrend will resume
SITO Mobile Ltd. (Nasdaq: SITO) operates as a mobile location-based advertising platform for businesses, advertisers, and brands primarily in the United States and Canada. It offers mobile location-based advertising and mobile messaging platforms to transform digital marketing by delivering targeted mobile advertising campaigns based on geo-location, in-store traffic, and customer response for brands, agencies, and retailers. SITO was incorporated in 2000 and is based in Jersey City, New Jersey.
SITO Mobile web site.
Shares outstanding: 16.3 million
Current price: $4.89
Market cap: $79.7 million
Insider ownership: 17%
Insider buys last 12 months: 31,241 shares
Insider sales last 12 months: 0
Shares in SITO Mobile Ltd. (SITO) have been on a strong uptrend over the last month as the chart below reveals, and we believe shares will continue to perform strongly due to reasons discussed in this article.
Note that there has been a low volume pullback in the last two days which we believe makes an excellent entry point.
Early Mover in High Growth Market
For the first time in history, more people accessed the Internet via mobile than wired devices in 2014, and the number of smartphones is expected to top 2 billion next year, up from just 1.3 billion last year.
However, advertisers are still playing catch-up to surging smartphone growth, as this graphic from Kleiner Perkins Caufield & Byers’ Internet Trends 2015 shows.
Companies are still in the process of moving their advertising dollars into underserved, high growth mobile/smartphone market. The disparities shown in the graphic above have created a $25 billion + market opportunity in the U.S. alone… an opportunity SITO Mobile is well-positioned to capitalize on with patented, disruptive technology.
The mobile ad market will be fueled by consumers’ big swing to using smartphones and tablets as their sole computing devices and will be driven by innovations in ad tech.
Superior, Patented, Disruptive Technology
SITO has 26 patents in the areas of mobile device applications, mobile marketing, streaming media and dynamic ad insertion. SITO technology delivers display ads and videos that feature the following competitive advantages:
- Geo Fencing
Customers are targeted within a certain radius of location and technology is utilized to push coupons, ads, promotions to mobile apps.
- Verified Walk In
Through this feature foot-traffic can be tracked to locations
- Behavioral Targeting
This feature tracks past behaviors over 30-90 day increments allowing for real-time campaign management
- Analytics and Optimization
This feature tracks user demographics, psychographics, CPM, click-throughs and time of engagement
SITO’s Location Based Mobile Advertising
Additionally, SITO offers a Mobile Messaging platform for building and controlling tailored programs, which include messaging and customer incentive programs.
In July, SITO acquired the mobile advertising business of Hipcricket Inc. The acquisition was priced at $3.7 million for a segment of Hipcricket Inc. that had a trailing twelve month revenue run rate of $6 million.
SITO Mobile CEO Jerry Hug stated:
(The acquisition) “represents a major growth catalyst for SITO Mobile in many ways. First, we add a great team of experienced mobile advertising professionals that will enable a smooth transition and continued growth within the mobile advertising industry. Second, due to Hipcricket’s expansive network, we are stepping into many great new relationships with marquee advertising clients. Additionally, we now have the ability to integrate the best features of Hipcricket’s technology, one that will help us continue to improve and enhance the breadth and performance of SITO Mobile’s proprietary Location Based advertising platform.”
Strong Revenue & Margin Growth
In the Company’s fiscal Q3 2015 reported last month, revenue jumped to $3.68 million, a 72% year-over-year increase over revenues generated for the three months ended June 30, 2014. Moreover, gross profit nearly doubled to $2.3 million. The Company’s Media Placement business (which delivered 59% of total revenue) experienced 32% sequential growth with a record-setting 68% gross margin. Mobile messaging contributed 38% of revenue.
The bottom line also saw dramatic improvement. For the 9 months ending June 30th 2015, SITO reported a loss of .12/share vs. a loss of .21/share for the same period in 2014.
SITO also ended Q3 with approximately $2.78 million in cash and cash equivalents vs. $620,000 on June 30th 2014.
As impressive as these results are, they do not include any contribution from the July Hipcricket acquisition, which had a trailing twelve month revenue run rate of $6 million.
In the Q3 conference call, SITO CFO, Kurt Streams, stated:
“They (Hipcricket) were running margins again around 55%. We feel very comfortable with the cost structure that comes along with what we thought. We think we’ve bought a profitable business going forward, so it will be a contributor.”
Superior Business Model and Technology Driving Growth
I spoke with CEO Jerry Hug recently in order to learn how SITO Mobile was able to achieve > 70% sales growth while increasing the gross margin to record levels. I wanted to get a better feel for the model, and what the chances are that this level of growth combined with strong margins could realistically continue going forward.
I also wanted to know what differentiates SITO Mobile technology from Millennial Media, which was just purchased by AOL for $250 million, (3X the market cap of SITO Mobile), even though Millennial Media had negative growth and profit margins were at -54% (!)
What I learned was that the SITO Mobile business model and (patented) technology platform have several inherent advantages that provide a competitive edge while also differentiating SITO from competitors.
SITO Mobile CEO, Jerry Hug:
“SITO Mobile has always been a mobile first platform focused solely on programmatic buying. This differentiates SITO from Millennial Media (MM) for example, because MM started off as an ad network, which means Millennial has ad inventory that it is responsible for monetizing. All ad networks are at a disadvantage in the programmatic space as their intuition is to sell and monetize their own ad inventory rather than being able to purchase the best performing inventory in real-time. This allows SITO to operate with much less overhead as we only buy what we sell and are able to purchase inventory that is uniquely positioned to perform for each campaign. MM did not have the flexibility on price and targeting that a true programmatic platform had which is why they bought Metaresolver, a DSP, in order to begin buying via our model. The Metaresolver purchase allowed MM to buy programmatically across their inventory and other SSPs but it did not shore up the issue of unsold inventory on the MM owned and operated sites and apps. This is why they purchased Nexage. The purchase of Nexage allowed MM to move all their inventory into the Nexage SSP and allow DSPs like SITO to purchase that inventory in realtime. SITO had already been a large buyer on Nexage and now has access and buys MM inventory as well. Although MM would see a decrease in CPMs compared to what they were able to achieve via direct buys, they would sell more of their inventory to make up for that loss. As you can see Millennial has been playing catch and has attempted to shore up their mistakes by pivoting a number of times away from the pure ad network model. All the while, DSPs like SITO have been advancing the targeting and technology around their own demand platforms.
SITO has separated itself from the pack by identifying the needs of the market and being able to use the location data within these mobile devices to drive much more accurate and relevant messaging and to provide closed-loop attribution at the store level. This is still something that larger media companies are forced to source out to 3rd parties. SITO is able to accomplish this in-house which gives us much greater insight into this data and provides our advertisers the granularity that they desire to make informed decisions on the success of their campaigns and how to adjust their other media based on these mobile findings.”
As a result, at MicrocapResearch.com, we believe there is plenty of evidence to suggest the extraordinarily strong growth SITO Mobile has been experiencing will continue. Moreover, the recent sale of Millennial Media (a company with declining growth and negative margins) for more than 3X the current market cap of SITO Mobile sheds some light on the potential future valuation.
NASDAQ Listing = Increased Visibility & Institutional Participation
SITO uplisted from OTC to the NASDAQ Capital Market last month, (press release), a move which will increase visibility to future retail and institutional investors alike. SITO is followed by just 3 analysts presently, and investors can reasonably expect that number to grow now that the company is trading on a senior exchange. We believe SITO’s mobile first platform, reduced overhead, “just in time” sales flexibility, Geo Fencing technology and more, make the SITO Mobile high growth story too good for analysts and institutions to pass on. In fact, the recent increase in volume/price may indeed have been an institution taking some initial positions in SITO shares.
Price Target $8.60+
SITO reported $9.6 million in revenue for fiscal year 2014, $11.3 million in revenue for the first 9 months of fiscal year2015, and we believe they will report in the neighborhood of $17 million in sales for 2015. We believe the competitive advantages of SITO’s technology and business model position the company to successfully capitalize on the $25 billion + mobile/smartphone advertising market opportunity ahead of it. We believe that at a minimum 50% revenue growth/year and margins > 50% are realistic for the foreseeable future.
With the recent sale of Millennial Media (which had negative sales growth and -54% profit margins) at $250 million, we see SITO as undervalued at the present $85 million market cap.
Being conservative, at an average 40% revenue growth over the next three years, sales would reach $47 million, or approximately $2.89/ share. Applying a modest price-to-sales ratio of 3 for a high margin, high tech company with patented technology experiencing > 50% revenue growth…we see a share price exceeding $8.60.
For reasons discussed above, we believe newly uplisted SITO Mobile (SITO) shares are just beginning to be discovered by both retail and institutional investors. Recent highs over $6/share came on higher volume and we believe the current pullback below $5/share on low volume makes an excellent entry point.
Disclosure: My partner and I are long shares of SITO Mobile (SITO).
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