Fast-growing companies in high-growth markets can prove to be big winners over the long haul — but only when investors buy these stocks at the right price. Unfortunately, the S&P 500‘s 15% rise so far this year has made finding these opportunities difficult. Many of the best growth companies have seen their stocks soar, giving them questionable valuations.
But not every high-growth company has received the attention it deserves…
Meet Telaria (NYSE:TLRA) — a company that is not only in the same industry as hot growth stock The Trade Desk (NASDAQ:TTD) but is also growing faster and trading at a much cheaper valuation than its highly respected peer. To be fair, I own Telaria stock myself, so take my recommendation with a grain of salt. But there are good reasons to bet on this fast-growing company.
A bet on connected TV
Telaria operates a video management platform to help premium video publishers optimize their digital ad inventory through software. In other words, the company serves the sell side of the programmatic ad market, with a specific focus on high-quality connected-TV publishers — that’s television streamed over the internet. Some of the company’s notable customers include premium video publishers such as Discovery Channel, Sling TV, Fox News, Disney‘s (NYSE:DIS) Hulu, and Sinclair‘s NewsOn, which provides access to live and on-demand local news broadcasts from over 200 stations, covering more than 90% of the population.
Telaria, formerly called Tremor Video, doubled down on the fast-growing connected-TV (CTV) market when it sold its demand-side platform two years ago. The sale happened about two months after Mark Zagorski took over as CEO. A few months following the sale or the platform, the company rebranded its business, changing its name from Tremor Video to Telaria, and set out to dominate its niche of helping premium video publishers monetize their CTV ad inventory.
The strategy is working. Revenue growth is accelerating as CTV revenue is growing as a percentage of total revenue. The company’s second-quarter revenue increased 47% year over year — up from 42% growth in Q1 and 31% in the fourth quarter of 2018. Second-quarter CTV revenue soared 133% year over year and accounted for 39% of total revenue — up from 24% and 5% of total revenue in the second quarters of 2018 and 2017, respectively.
“The strategic decision to focus our business on CTV is being proven out by increasingly compelling market dynamics regarding CTV scale and penetration, the growth of ads for CTV content, and a rapidly emerging programmatic opportunity in the space,” said Zagorski in the company’s second-quarter earnings call.
Telaria’s laser focus on CTV has enabled it to morph into a leader in its niche. In May, the company said it now has five of the top seven virtual multichannel video programming distributors as customers.
A powerful business model
Not only is Telaria’s top line growing rapidly, but the company also boasts a lucrative business model. Its trailing-12-month gross margin is 84% — higher than The Trade Desk’s gross margin of 76% over the same timeframe. This impressive margin is due to Telaria’s emphasis on premium video publishers, which generally boast digital ad inventory that monetizes at a higher effective cost per mile (eCPM) — the amount an advertiser pays for every thousand views or clicks on an ad — than other digital ad products.
While Telaria isn’t consistently profitable yet, its combination of soaring revenue and scalability mean that meaningful profits are likely to be on the horizon. Indeed, the company is already guiding for full-year positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) between $2 million and $5 million, up from negative-$0.4 million in 2018.
Shares look undervalued
Here’s where Telaria gets really interesting. Despite its compelling positioning in the CTV programmatic advertising market, the company has a far more conservative valuation than peers The Trade Desk and Roku (NASDAQ:ROKU). Consider how Telaria measures up to these companies on key performance and valuation metrics such as gross margin, revenue growth rate, and price-to-sales ratio…
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