What a Thursday it was for Izea (NASDAQ:IZEA). The nano-cap marketing firm saw its stock rise 174% after it announced a deal to acquire TapInfluence.
But caution might be advised. Izea still has a market cap of less than $20 million after falling 32% since Thursday’s close. The big gains came after IZEA stock hit what appears to be an all-time low just a few sessions before. The company remains unprofitable, and solvency is a concern.
For investors who believe in the power of “influencers”, and/or those who see Izea growing into profitability, there’s a case to take a high-risk gamble here. But the rally in IZEA stock already looks potentially overblown, and investors need to enter any position with both eyes wide open.
How Izea Got Here
Izea claims to have invented the “influencer marketing space”. Back in 2006, the company set up a platform through which bloggers could be paid to produce content for brands. That’s now expanded into programmatic publishing (following the trends in the digital space; AT&T Inc. (NYSE:T) recently made an acquisition of a key programmatic player), content management, and payment processing, among other functions, through its IZEA Exchange.
It’s an intriguing idea. Unfortunately for IZEA shareholders, it hasn’t really worked yet. After Thursday’s gains, IZEA stock is up 17% so far this year. But it’s still down 72% over the past three years. Revenue has risen, and losses have narrowed. But that’s been with the help of two acquisitions (EByline in 2015, ZenContent in 2016). The company continues to burn cash, and organic growth has slowed. As a result, investors for the most part had been bailing until last week.
The TapInfluence Deal
But there is some hope here. As recently as November, sell-side analysts were pushing IZEA stock. Ladenburg Thalmann set a $10 target, citing the additions of Alphabet (NASDAQ:GOOGL) and Amazon.com (NASDAQ:AMZN). Craig-Hallum said IZEA was worth $7.
And now Izea is trying to consolidate the influencer industry with the purchase of TapInfluence. Izea is paying roughly $7 million, with $1.5 million in cash and the rest in stock. TapInfluence’s 2017 revenues were about $5.9 million — but billings were $18 million. Combined, this is now a company generating $30 million in sales — and $47 million in bookings. Against a fully diluted market cap of under $20 million, that suggests some upside, but only if Izea can reach profitability at some point.
IZEA Stock Needs More
That remains a big if, however. Revenue fell 19% year-over-year in Izea’s first quarter — and Adjusted EBITDA was negative $1.8 million. The company said in its release that contractual commitments had been pushed out, but also admitted that a strategy to diversify away from larger customers would take “two to three quarters” to play out.
Meanwhile, cash burn remains an issue. Izea had to offer 3.556 million shares — nearly 60% of its previous total — at just $1.00 per share in an offering that closed earlier this month. Even with that cash, after paying for TapInfluence, Izea would have closed Q1 with less than $5 million in the bank. It burned over $2 million last year, and over $1 million in this year’s first quarter alone.
From here, that’s a risk not worth taking. The business model is interesting… but hardly compelling. Digital advertising has proven to be a brutally difficult space for pretty much everyone except Google and Facebook (NASDAQ:FB). Izea has tried to make some feints toward ‘hot’ areas — announcing “Izea Crypto” in January and citing an artificial intelligence rollout in September — but that’s not what this business is. It’s a lower-margin platform that long has struggled with demand.
It’s possible that TapInfluence changes that. And if it does, the gains in IZEA stock will be just the start. But the clock is ticking, and Izea’s legacy business needs to get fixed, too, or else Thursday’s gains could seem like a last hurrah…and a final opportunity for stockholders to get out.
As of this writing, Vince Martin has no positions in any securities mentioned.
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