MAX - MediaAlpha Awaits Insurance Spending Rebound

Summary

• MediaAlpha reported its Q3 financial results on November 3, 2022.
• The firm helps U.S. insurance carriers source new customer leads online.
• MAX has suffered from a drop in industry spending and it's anyone's guess when that environment will improve.
• I'm on Hold for MAX in the near term.

A Quick Take On MediaAlpha

MediaAlpha ( MAX ) reported its Q3 2022 financial results on November 3, 2022, beating revenue but missing EPS estimates.

The firm operates a programmatic advertising platform for the U.S. insurance industry.

While MAX may be well positioned to benefit from a rebound in insurance carrier spending and continued transition to online activity, the questions are when that will occur and how quickly it will rebound.

Until we gain visibility into the answers to those two questions, I’m on Hold for MediaAlpha.

MediaAlpha Overview

Los Angeles, California-based MediaAlpha was founded to create an online programmatic ad purchasing and management system for insurance carriers to obtain prospective leads for new customers.

Management is headed by co-founder, president and CEO Steven Yi, who was previously CEO of Fareloop, a travel comparison website.

The firm integrates its offering to connect with major Internet search engine advertising systems while providing insurance carriers with a single interface to manage their campaigns.

CustomerAcquisition and Market

The company pursues client relationships with insurance carriers via a direct sales force.

The firm generates fee revenue for each customer referral and such revenue isn't contingent on the ultimate sale of an insurance product to each consumer.

According to a 2020 market research report by Allied Market Research, the global auto insurance market was an estimated $739 billion in 2019 and is expected to reach more than $1 trillion by 2027.

This represents a forecast CAGR of 8.5% from 2020 to 2027.

The main drivers for this expected growth are an increasing number of road accidents in many countries as well as mandated insurance coverage in more regions and the implementation of stringent government regulations.

Also, emerging economies will also see an increase in discretionary income producing growing demand for motor vehicles and their attendant insurance coverage requirements.

The Asia Pacific region is expected to produce the fastest growth through 2027 as it increases its adoption of mobile telematics technologies.

MediaAlpha's management sees the direct-to-consumer market as the fastest-growing insurance distribution channel in the years ahead, as tech-enabled distribution becomes more favored by younger demographic consumers.

MediaAlpha’s Recent Financial Performance

• Total revenue by quarter has fallen according to the following chart:

• Gross profit margin by quarter has produced the following results:

• Selling, G&A expenses as a percentage of total revenue by quarter have increased materially in recent quarters, a negative trend:

• Operating losses by quarter have worsened, as the chart shows below:

• Earnings per share (Diluted) have also deteriorated further into negative territory recently:

(All data in the above charts is GAAP)

In the past 12 months, MAX’s stock price has risen 21.9% vs. that of the Nasdaq 100 Index’s drop of 10.2%, as the chart indicates below:

Valuation And Other Metrics For MediaAlpha

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Commentary On MediaAlpha

In its last earnings call (Source - Seeking Alpha), covering Q3 2022’s results, management highlighted the drop in variable marketing spend from auto insurance carriers due to ‘ongoing inflation-driven underwriting losses.’

In response, leadership has focused on what it can control, which is on the expense side of the business.

Despite this focus, SG&A as a percentage of total revenue rose sharply as revenue declined in a difficult carrier spending environment.

As to its financial results, total revenue dropped 41.7% year-over-year, while gross margin also fell.

Management did not disclose any retention rate metrics.

Operating losses continued their path, worsening sequentially and year-over-year, while earnings per share also deteriorated further into negative territory.

For the balance sheet, the company finished the quarter with $30.2 million in cash and equivalents and $190.3 million in total debt.

Over the trailing twelve months, free cash flow was $56.5 million, of which capital expenditures accounted for only $200,000. The company paid a hefty $56.6 million in stock-based compensation in the last four quarters.

Looking ahead, management only provided Q4 2022 guidance, with revenue decreasing by 29% year-over-year at the midpoint of the range.

Regarding valuation, the market is valuing MAX at an EV/Revenue multiple of around 1.4x.

The primary risk to the company’s outlook is a continued tepid spending environment by auto insurers, especially if inflation proves ‘sticky’ and is slow to drop despite a rising interest rate environment.

While the firm may be well positioned to benefit from a rebound in insurance carrier spending and a continued transition to online activity, the questions are when that will occur and how quickly it will rebound.

Until we gain visibility into the answers to those two questions, I’m on Hold for MediaAlpha.

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