Stock of the moment – Taptica International the hidden gem

Stock of the moment – Taptica International the hidden gem

Stock of the moment – Taptica International

TAP: Taptica current stock price: £2.72. Intrinsic value: £3.94. Margin of safety: 44%

The key to successful investing

Charlie Munger, Warren Buffet’s legendary wing-man, once stated that the key to successful investing:

“is the ability to do nothing 99% of the time, combined with an ability to aggressively seize that 1% opportunity, of which the average investor can expect to encounter only a few in their lifetime.”

Well I’ve been waiting for this moment for a while. Never have I seen an opportunity like Taptica.

taptica

What is Taptica?

Taptica is a global mobile advertising platform that helps the world’s top brands reach their most valuable users through targeted ads. Its proprietary technology leverages big data and, combined with state-of-the-art algorithms, enables quality media targeting at scale. It’s customers include Amazon, Disney, Facebook, Twitter, OpenTable, Expedia, Lyft and Zynga.

Essentially, they gather your data for advertisers and consider whether or not you are likely to buy the company’s products. How? Cookies of course.

Cookie monster

If you aren’t a big spender, then they won’t target the ad at you. This is a game changer.

Let’s face it, Facebook, Instagram, Google and Twitter are all top platforms for companies who want to advertise online. At the same time they require pinpoint targeting for campaigns to deliver a strong ROI. Taptica solves this issue.

I’ve worked at a retail start-up where mobile advertising was a key driver for revenue. The company was willing to spend BIG despite its restrained marketing budgets. This advertising shift has been a tidal wave in the last couple of years and companies are only just starting to allocate their marketing budgets to mobile devices. Taptica is therefore very well placed to take advantage of this trend.

The fundamentals

The company released a trading update on the 25th of Jan 2017 however the market has hardly taken any notice of it. On March 20th 2017 Taptica’s full results will be announced – there may be variances to the below which we must consider.

Revenue growth has been strong with an increase to $125 million from $75 million underlining the success of their mobile strategy.

All things equal, Taptica will announce EBITDA for FY17 at circa $25 million compared to $7.4 million last year. That’s an incredible 238% increase in EBITDA.

When you consider that Taptica’s market capitalisation is £166m then the firm is only trading at 8 x EBITDA. That’s a low multiple for a start-up which is in The Deloitte Technology Fast 50™! A conservative multiple would be more like 12 x EBITDA and would value each share at £3.87, representing a 41% uplift from today’s close of £2.72.

What about earnings per share though?

Last year Taptica achieved 11 pence per share. At 15 X earnings (Peter Lynch’s mean reversion earnings multiple) the stock was valued fairly at around £1.65. Analyst’s now expect earnings to be around 22 pence this year which values the stock at £3.30. Taptic and has literally doubled its money.

The stock is therefore currently below the most conservative of values and this is a company which compares to the likes of Shopify. Context alert: Shopify is making a loss and is only generating 2 times Taptica’s revenue. Shopify is valued at $5 billion… now compare that to taptica’s £166 million price-tag.

The intrinsic discounted cash flow value of Taptica at a growth rate of 15%, a discount rate of 11% and a perpetuity rate of 1% values the company fairly at around £3.94

The balance sheet is also impeccable and continues to be highly cash generative. Taptica had a cash balance at 31 December 2016 of ~$21m (30 June 2016: $9.5m), after a $3.5m interim dividend payment in November 2016.

Taptica is the most undervalued high quality growth stock on the market.

The market is sleeping

The sleepy market and Taptica’s under the radar status has allowed me to achieve an average purchase price of £2.36. I began purchasing heavily from £2.oo a share. Taptica’s current fair value is around £3.90. If the market awakens it may be pushed to greater heights.

The Future is bright, the health is strong and the value is low – rarely do these traits emerge in unison.  Earnings are announced in 7 days. This is that 1% opportunity that Munger spoke about.

Disclosure: long Taptica.

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