Millennial Media (MM) is having a tough day.
While mobile is red-hot — as seen with the performances from Facebook (FB) and Yelp (YELP) — Millennial Media just can’t seem to get a piece of the action.
In today’s trading, Millennial Media shares are off 18% under $7. That’s a far cry from where it stood last March. MM came public in early 2012 and surged 92% on its first day of trading. The high was about $25.
The catalyst for today’s drop: Millennial Media had another disappointing quarterly report. On the positive side, Millennial did post adjusted earnings of 2 cents per share, while Wall Street was looking for a net loss of 1 cent.
Unfortunately, the top line was not so good. Revenues came to $57 million (up 45% YOY), which was below the consensus estimate of $59.2 million.
Another thing that sent investors fleeing: the announcement of a mega-acquisition, which will be highly dilutive. Millennial Media has agreed to issue 24.6 million shares for Jumptap, which is another ad network. That’s not a cheap price considering the transaction represents about 22.5% of the ownership of the company.
Still, there are certainly good reasons for the deal. A few of them:
- Programmatic Approach: Over the years, Jumptap has focused on building solutions that highly automate the bidding and other processes for ad campaigns. The company has also invested in systems that help to optimize the performance, such as by leveraging real-time data.
- Targeting: Jumptap has put together partnerships with over 20 third-party data providers. With this, the company has been able to greatly improve the overall targeting of its ads.
- Screens: While Millennial is mostly focused on mobile, Jumptap has the advantage of going beyond this. For example, it has a healthy business for PCs and has been getting more aggressive with TV.
- Scale: Perhaps the most important reason for the acquisition is scale, though. After all, the online ad market is dominated by mega players like Google (GOOG) and Apple (AAPL). But with a Millennial-Jumptap combination, the new entity will reach a market share of nearly 29% of the U.S. mobile market (based on 2012 numbers from IDC, which Millennial provided in its conference call).
- Credibility: Plus, the deal will give it more credibility, which will be crucial for getting new customers. This is important since the company has been experiencing a deceleration in growth during the past year or so.
There are a few other things to like about Millennial Media — outside the deal — as well. For one, it continues to push its product development. To this end, the company’s SDK 5.0 is getting getting traction. The platform allows developers to integrate video, which generally has higher ad rates.
Millennial also has remained committed to global expansion, especially in Asia. Keep in mind that there are over 2 billion mobile device users in the market, which represents over half the world’s total.
Still, the risks are substantial as the integration of Millennial-Jumptap will be far from easy. If anything, there will likely be lots of distractions … at least in the short run. And it will probably take a few quarters to get things on track, as is inevitable for any large deal.
In other words, it’s reasonable that investors are dumping shares right now. Millennial Media is still a work in progress.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.