TAP: Looking at a Valuation of Taptica PLC

Taptica

 

Taptica PLC is up 142% year-to-date.  It has grown revenues at a compound annual growth rate of 44.5% over the past five years, and net income at 40% over the same period.  Yet bizarrely it sits on a P/E ratio of only 13.7 times forward earnings.  It’s time to take a look.

The Company

AIM-listed Taptica International PLC is headquartered in Tel-Aviv, and has offices all around the world.  A quick look on Google Finance offers this description of the business:

“Taptica International Ltd offers data-focused marketing solutions that drive execution and brand insight in mobile, leveraging video, native, and display to reach the users for every application, service, and brand. The Company’s technology is based on artificial intelligence and machine learning at big data scale”

Wonderful.  But what the heck does that mean?  In a nutshell, Taptica parter with advertisers who leverage use of their database of 220m+ users to deliver targeted and timely ads via different media channels.  This use of ‘big data’ allows advertisers to be more surgical and cost-efficient in their advertising, and gives them detailed insight into user behaviour.  Taptica illustrate this in their most recent annual report:

Taptica
Source: Taptica Annual Report 2016

So as complicated as the underlying technology is, its revenue model is rather simple.  The value in the business is obviously their growing database of users, with over 100 individual data points per user.  This data is constantly being updated based on user activity, and therefore stays up to date and relevant to advertisers.  Taptica have wisely pivoted towards mobile, which now accounts for 86% of revenue, up from 61% the previous year.  Alongside this, the company is a Facebook marketing partner due to their acquisition of AreaOne in 2015.  With Facebook generating ad revenues of nearly $27bn in 2016, this appears a very astute purchase.  Global ad spend topped $200bn in 2016, and is set to continue higher, with Facebook and Google taking a large piece of the pie.  Taptica’s Tier 1 customers include Amazon, Disney and Expedia.

The Numbers

2016 was a banner year for Taptica, and in their annual results put this down largely to their decision to focus more on mobile advertising. The company also place emphasis on their heavy and growing investment in R&D, which has trebled in the past two years, and now accounts for approximately 14% of gross profit.  The acquisition of AreaOne has provided an entry point into Asian markets, opening offices in China, South Korea and Japan, providing further catalysts for growth:

“As a result, during the period we earned our first meaningful revenues from the Asia-Pacific region, the largest and fastest growing digital retail market in the world, with approximately 10% of mobile revenues being generated in this geography.” – 2016 Annual Report

During this period, Taptica also opened an office in the UK, with a focus on “entertainment, e-commerce, retail, digital banking, travel and gaming” sectors, with a view to leveraging this presence to grow into Europe.

The pivot towards the mobile ad space has clearly been a wise move for Taptica.  In 2016, their first full year of this strategy, gross margins increased to their highest ever recorded at 36.5%.  Combined with a near 400% increase in operating margins on the prior year, net income increased from $2m to $16m.

Balance Sheet

Taptica
Source: Taptica Annual Report 2016.  Click to expand.

Taptica have no long term debt, and all current liabilities are more than covered by cash and receivables.  The company’s revenue model, as noted above, means that their maintain positive working capital.  Payments to Taptica from advertisers occur before payment is made to publishers from Taptica.  The balance sheet is necessarily fairly light due to the intangible nature of Taptica’s business model.  Their user database is where the value lies, and this is something that will grow without necessarily corresponding to a larger balance sheet.  Therefore whilst the current valuation seems cheap, the company still trades at 6.5 times book value.  Acquisitions are made in cash, due to the cash generative nature of the business.

Cash Flow

Taptica
Source: Taptica Annual Report 2016. Click to expand.

Whilst R&D expenditures are necessarily a substantial part of Taptica’s investment strategy, capital expenditure on property, plant and equipment remains relatively modest.  This model therefore is consistently sufficient to generate free cash for acquisitions, which have been made every year since their admission to AIM in 2014.

Taptica Valuation

Taptica’s current valuation metrics are enticing, given the growth of the company:

  • Price/Earnings: 21
  • Forward P/E: 13.7
  • PEG: 0.02
  • Price/Sales: 2.7
  • Price/Book: 6.5
  • Price/Cash Flow: 17
  • Yield: 2%

So now to look at a discount cash flow valuation. Here are the calculations:

  • Free cash flow has been some what lumpy since 2011 (though always positive).  Free cash flow last year was $19m, but an average of the past six years results in a figure of $7.5m
  • Net income has grown, as mentioned, at 40% for the past five years, although this is somewhat skewed by the fantastic results in 2016.  I’ll halve this to 20%, which I believe is reasonable, and that this growth can continue for the next ten years.
  • As I usually do, I assume growth slows to 3% after these five years to reflect an implied average inflation rate.

Based on this calculation this gives a potential intrinsic value of £5.27, against a current valuation of £4.00.  A potential discount to intrinsic value of 31.75%.

I think this is quite a conservative valuation.  What if we took the increased free cash flow of 2016 into account and changed the average from $7.5m to $12m?  This results in an intrinsic value of £8.44.

If we stick with $12m but lower the average growth rate for the next ten years to 10%?  We get £3.80.

Summary

This exercise is, by design, rather fluid.  If you put garbage in, you get garbage out, and if you want a company to appear cheap, you can certainly get there by tweaking the numbers.  What I’m looking for is not a hard figure, but a range of possible valuations that, on balance, give some margin of safety.  I’m looking for the upside to be substantively larger than the downside.  I believe in Taptica I have found such a situation.

Happy investing!

 

If you’d like to discuss anything contained in this article, contact me on Twitter @britishinvestor, or leave a comment below.

Disclosure: Taptica is a constituent of the portfolio.

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