The past few years have been mostly agony for shareholders of mobile ad network operator Millennial Media (MM). And today we saw the nightmare continue, with MM stock down a grueling 38% to about $3.30. The 52-week high is $10.48.
So what happened? And what does the implosion mean for the rest of the ad tech sector?
Well, of course, the catalyst for the selloff was the first-quarter report. Millennial Media posted revenues of $72.6 million, which was below the Wall Street consensus of $75.5 million. Yet the Q2 guidance was even worse. Millennial Media put out a forecast of revenues of $70 to $75 million while analysts were hoping for $96.4 million.
And to top things off, the company also announced the departure of its chief financial officer.
Granted, Millennial Media operates a strong platform, which includes more than 60,000 apps and benefits from relationships with 90 of the Ad Age top 100 advertisers. And the company continues to innovate. For example, one recent product allows for location-based targeting and another helps with cross-screen advertising. What’s more, the company has a 77 issued patents and many more pending. They cover key areas like contextual/behavioral advertising, the use of third-party data, and the serving of ads across multiple devices.
But of course, the biggest driver is the strong growth in the mobile market. According to a report from Gartner, global spending is expected to jump from $18 billion in 2014 to a whopping $41.9 billion by 2017.
Yet there is a nagging problem for Millennial Media: intense competition. Already Apple (AAPL) and Google (GOOG) are top players and have huge advantages, such as the control of the underlying operating systems and platforms like YouTube.
But there are also two other new entrants in the market — that is, Facebook (FB) and Twitter (TWTR). Both will certainly benefit from their global brand names, massive platforms and large advertising bases. These companies include the core social networks as well as Instagram, WhatsApp and Vine.
Facebook could be the biggest new threat. Over the last year, it has powered the installation of 350 million apps. Keep in mind that — for Millennial Media – the main culprit for the falloff in revenues was the app-install business.
But things could get even worse: Facebook just launched its own ad network last week. Actually, I was at the event and yes, the system was impressive. It has an intuitive interface that allows for the creation of native ads (those that blend in with the look-and-feel of an app design). At the same time, Facebook’s extensive database assets provide highly targeted campaigns. Then there is App Links, which makes it easy for an ad to transfer the user to the relevant part of an app. For the most part, this means much better conversion rates.
Given all this, it will definitely be tough for smaller ad networks to get traction. Just look at some of the recent IPOs:
With all the major Internet operators having their own top-notch ad networks, does it make sense to look at alternatives? Probably not. For most companies, the costs of training and devoting resources to rival platform could be tough to justify.
So while many of the newly public ad-tech companies are trading at more attractive valuations, this may be a value trap. The fact is that the industry is quickly consolidating and it appears likely that an outsized share of the mobile opportunity will go to the players that have global scale. In the end, there will be a dwindling amount of spending available and this will probably mean continue pressure on ad-tech stocks.
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.