Over the past 12 months, shares in online advertising group Taptica International (LSE: TAP) have slumped 50%. The most significant decline came at the beginning of December when the enterprise announced: “Hagai Tal, CEO of the Company, has today been found liable for certain statements made in relation to the sale of Plimus Inc.” When Plimus was sold in August 2011, Tal was CEO. He has since resigned from the board at Taptica.
As well as announcing the above legal action against its CEO, Taptica’s December trading update also contained a warning. “Revenue below expectations due to the forgoing of some lower-margin sales,” the update reported, although it also told investors full-year EBITDA would be ahead of market expectations.
The group has since noted it closed the 2018 financial year “in line with management expectations,” and at the end of the year, the firm had net cash of $54.4m after the payment of dividends.
Growing the business
The City was expecting Taptica to report earnings growth of 98% for 2018. Growth was expected to slow in 2019, but now the company has announced it’s acquiring peer RhythmOne. Under the terms of the all-share deal, Taptica and RhythmOne “will combine to create a force to be reckoned with in the mobile video advertising industry.”
According to management, the enlarged group will be “one of the leading video advertising companies,” which should allow it to compete more effectively in the fast-growing space, particularly in the United States where the market is expected to grow from $17.9bn (2017) to $27bn by 2021. As part of the deal, Taptica will be acquiring RhythmOne’s cash balance of $18m. Immediately after the deal is closed, the new, larger enterprise plans to spend $15m buying back shares, returning capital to investors and offsetting some of the dilution from the all-share merger.
I’m quite excited about what the future holds for the post-merger Taptica. The company is already highly cash generative and is snowballing. By combining with its peer, the company should be able to achieve better profit margins and offer clients a better all-around deal, which should lead to enhanced growth. That can only be good news for shareholders.
However, right now it seems as if the market still doesn’t trust Taptica after December’s slip-up. The stock is currently trading at a forward earnings multiple of just 5, without taking into account the amount of cash on the balance sheet.
According to my calculations, cash is worth around 59p per share, which gives a cash-adjusted forward P/E of just under 4, a discount of more than 50% to the rest of the media and publishing sector.
With earnings growing at a double-digit rate, I think a multiple in the mid-teens would be more suitable for this business. With that being the case, I can see an upside of at least 100% or more from current levels for Taptica’s shares.
In my opinion, that’s a risk-reward ratio worth buying.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.