The IPO market has been generally robust this year, but some specific sectors have lagged badly.
Of particular note: Advertising tech companies.
The latest deal to hit the market actually came today — YuMe (YUME) priced 5.1 million shares at $9, which was well below the initial range of $12 to $14, and shares look like they’ll only advance slightly by Wednesday’s closing bell.
We’ve seen similar action in other related deals. Tremor Video (TRMR) is off 20% since its late June IPO. Then there is Marin Software (MRIN), which has posted a loss of 13% since going public in late March.
Even Millennial Media (MM) — which is in the red-hot mobile space — has been a failure, off 31% since March 2012 (including a 7% haircut as of late Wednesday trading).
While there’s not much to like there, big losses sometimes can be an opportunity for bargain-hunters. Certain IPO sectors have been known to shake funks; for instance, the much-maligned social space has been resurgent, as shown by recent gains in Facebook (FB), Groupon (GRPN) and Yelp (YELP), up 45%, 60% and 70% in the past three months alone. Not long ago, these companies were considered washed up!
But the ad-tech space might be different.
One key difficulty for ad tech companies is that massive scale is pivotal. Advertisers want reach, which allows for better targeting.
However, mega operators like Apple (AAPL), Yahoo (YHOO), Microsoft (MSFT) and Google (GOOG) already have scale — and moreover, they already have tremendous resources to leverage their own platforms.
Another issue: Many ad-tech companies are still losing money despite having been around for a while. These companies usually get small margins on their ad buys, and they also require aggressive investment in R&D. (Engineers aren’t cheap!)
Plus, the typical customer for an ad-tech company is a traditional agency. This is fine, but the industry is undergoing consolidation, which should provide more negotiating leverage. The result? Continued pressure on margins.
Given all this, it looks like the biggest payday for many of these companies will have to come via selling out. In fact, we got such a deal today in the form of AOL’s (AOL) $405 million buyout of Adap.TV. However, the waters are otherwise murky, with no particular company in the space looking like any more of a buyout target than others right now.
Bottom line: The risks in advertising tech look high right now, and success will probably be more dependent on luck than good research. Stay away unless you’ve got some speculative cash to throw around.
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.
