APPS - The Bottom Fishing Club: Tremor International

2023-06-02 06:39:19 ET

Summary

• Tremor International's undervalued stock is well-positioned for outstanding performance over the next 12-24 months, given a turnaround in the online media advertising market.
• The company has high gross margins, low debt, and strong cash flow, making it an attractive investment opportunity.
• A share price of $10 to $15 is possible by early 2025, good for gains of +50% to +120%, as a best-case scenario.

Israel-based Tremor International Ltd ( TRMR ) became a publicly-traded company in the U.S. during June 2021 through an ADS listing. It has not been a fun or profitable ride had you bought shares at the $18 IPO price. Today, this media/advertising agency is sitting under $7. The company focuses on digital marketing campaign creation and tracking.

Effectively, a recession in advertising demand since late 2021 has pushed shares into a truly undervalued position today. I can argue this name is perhaps the best-situated in digital advertising to deliver outstanding performance for owners over the next 12-24 months.

Share sellers appear to have given up in May, as trading volume has evaporated, with price rebounding strongly over the past several weeks. Given a meaningful turnaround in the online media advertising market during 2024, Tremor could become a leading upside choice for investors.

Ad Sales Solutions and Tracking

Tremor provides end-to-end software platforms that enable video advertisers to reach relevant audiences and publishers. The demand side platform [DSP] offers full-service and self-managed marketplace access to advertisers and agencies to execute their digital marketing campaigns in real time across various ad formats. Its sell supply side platform [SSP] generates access to data and a comprehensive product suite to drive inventory management and revenue optimization. The company also offers data management platform solutions, which integrate DSP and SSP. Customers include ad buyers, advertisers, brands, agencies, and digital publishers.

Cheap Valuation

The slide in TRMR stock's valuation is easily visible when we take a look at enterprise values (equity + limited debt - high cash levels on the balance sheet) vs. basic cash EBITDA and revenues. And, on a forward review, using current Wall Street analyst estimates, today's overall share valuation setup vs. operating results is a good 70% to 80% below the IPO level.

How does an EV to forward EBITDA multiple of 2.8x stack up against other ad agencies, especially those focusing on digital media? I am comparing Tremor to The Trade Desk ( TTD ), Omnicom Group ( OMC ), Magnite ( MGNI ), WPP plc ( WPP ), PubMatic ( PUBM ), Direct Digital ( DRCT ), Digital Turbine ( APPS ), Integral Ad Science ( IAS ) and Stagwell ( STGW ). You can see for yourself, Tremor may be the least expensive of them all. The stock is priced at a 65% discount to the median average of the group on this important ratio-analysis data point.

What about price to forward 1-year earnings? Using this yardstick, a near-future P/E of 7x is trading at a rough 30% discount to the peer group.

You would think this low valuation would be matched against weak margins and excessive debt. A fair assumption, but the opposite may prove true in the end. For sure, operating margins at Tremor have been negatively affected by the slow digital advertising environment of early 2023.

Nevertheless, gross margins are essentially the highest of the group! During the recovery phase of the economic cycle, I suspect future profit growth may perform far better than peers.

Of critical importance, the debt to assets ratio is one of the most conservative/flexible readings in the industry, which is on the desirable side of the equation for new investment.

In addition, cash flow to debt (of those generating positive cash flow over the last 12 months) is currently sitting in the strongest position of them all. Cash flow generation over the trailing year is almost equal to total debt held, meaning management could pay off all debt in theory, if it directed cash flow in that direction.

The bullish news is Tremor already held $190 million in cash at the end of March vs. $133 million in total debt and lease obligations. So, any and all future cash flow can be used to: (1) grow the business rapidly through capital expenditures or bolt-on acquisitions, (2) completely pay off debt over the next 12-24 months, (3) initiate a meaningful return of capital to shareholders with a nice dividend payout, and/or (4) buy back 20% to 30% of outstanding issued stock into the end of 2024, financially engineering a much greater underlying value for existing stakeholders with a sharply higher stock quote.

Reversal Chart Pattern?

For weeks, Tremor has been part of my sorting formulas searching for stocks rising on low trading volume. On the 18-month chart below of daily price and volume changes, I have boxed in green the late April to early June period of ultra-low volume. Often, rising price on slower-than-normal volume can be a tell of shrinking overhead share supply. If any bullish news appears, a shortage of selling interest can produce a spike in price.

Price itself is ready to break above its 200-day moving average for the first time in the company's trading history, and the 50-day moving average is turning higher.

A low-volatility balance between buyers/sellers appears to have been broken to the upside since the middle of May. The 21-day Average Directional Index situation is similar to the price bounce in January (circled in blue).

Lastly, both the Accumulation/Distribution Line and On Balance Volume bottomed near the end of 2022 (listed in red). The March price selloff to $5 a share was not confirmed by either of these two indicators. Such a pattern can signal a quote bottom has been reached.

Final Thoughts

It doesn't make a lot of sense to me, for potentially the highest-margin ad agency business a year or two out, to be the least expensive for a valuation today. This disconnect is the investment opportunity. Assuming a serious global recession can be avoided in the second half of the year, Tremor could easily morph into a huge gainer on better days in the advertising industry by 2024.

What go wrong? The biggest investment risks are now macroeconomic in nature, in my opinion. Either a serious and prolonged recession, or a stock market crash could pull Tremor under $5.

However, with a liquid balance sheet, prices in the fours may open a terrific long-term buy entry level. Management is projecting $145 million in EBITDA for 2023 (during a weak ad environment) vs. an equity market capitalization of less than $500 million.

What's the upside? Takeover rumors were swirling in March, and the cheap valuation could support an offer from private equity or another digital ad agency. For sure, that would be a secondary kick in the pants to create quick gains for investors.

I am modeling a share price of $10 to $15 is possible in 12-24 months, using minor improvements in operating results next year, and valuation metrics closer to peer averages today. Such would translate into gains of +50% to +120%, as a best-case scenario. I rate shares a Buy and own a small stake.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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