Why The AppNexus IPO Will Be Worth Waiting For?

  • Ad tech market leader AppNexus is rumored to file for IPO and possibly go public this year.
  • AppNexus raised almost $290M and was valued at $1.5B on its recent series F funding round.
  • The strong competitive position, WPP deal, and market growth potential makes AppNexus an attractive investment.
appnexus_ipo

AppNexus is currently the hottest name in the ad tech industry and an upcoming IPO candidate according to a recent interview with the company’s CEO Brian O’Kelley. For those who are not familiar with AppNexus, it is an advertising marketplace where advertisers and customers can buy and sell digital advertising campaigns with integrated interfaces to Google's(NASDAQ:GOOG) (NASDAQ:GOOGL) DoubleClick, Microsoft's(NASDAQ:MSFT) AdECN, and other leading networks. The New York-based company was founded in 2007 by leading ad tech executives Brian O’Kelley and Mike Nolet of Right Media (that was acquired by Yahoo), and Google DoubleClick executive Michael Rubenstein joined a bit later.

The gross transaction value exchanging hands in the AppNexus marketplace is estimated to have crossed the $2B line in 2014, which reflects a 100% growth year-over-year and a 300% increase compared to 2012. AppNexus generates revenues from fees charged for transactions made on its platform. AppNexus revenues in 2014 stood at $250M. In an official announcement in late 2014, AppNexus mentioned that the company is profitable for at least three straight quarters.

Ad Tech Industry

The total in global ads spent in 2014 was more than $140B, reflecting an ad tech possible market size of $3B in revenues based on a 2% transaction fee. As shown in Chart 1 below, AppNexus dominates the ad tech market with more than a 30% share out of the top 1,000 sites according to the Alexa rankings.

AppNexus_Chart 1_072715

The ad tech industry is going through a massive consolidation process, and AppNexus is taking an active and central role in this process. As recent as March 2015, AppNexus completed its fourth acquisition when it acquired Yieldex for $100M in cash and stock to boost AppNexus’s publisher solutions. Yieldex provides analytics tools that enable publishers to have forecasting capabilities that increase their revenue and yield. The first two acquisitions were made in 2014 when AppNexus bought ad tech startups MediaGlu, OAS, and Alenty for undisclosed sums.

Internet advertising is enormous, and according to a report by ZenithOptimedia, this spend is expected to rise to $160B in 2016, and market leader AppNexus is best positioned to monetize on this growth and increase its revenues substantially. Assuming the Internet ads spend will actually reach $160B in 2016, it will drive $3.2B in transaction costs for the ad tech industry, which reflects revenues of more than $1B for AppNexus, who controls almost a third of the market.

Funding and Valuation

AppNexus raised almost $290M in seven equity funding rounds from December 2007 to April 2015, the latest of which is considered by many the company’s pre-IPO funding round. As shown in Chart 2 below, AppNexus’s valuation reached a peak of $1.5B in its latest series F funding round, in which the company raised $62.7M.

AppNexus_Chart 2_072715

Early shareholders in AppNexus include leading venture capital funds like Andreessen Horowitz, Khosla Ventures, and SV Angel as well as tech giant Microsoft and advertising giant WPP. The British advertising holding company WPP reached a 15% stake in AppNexus after injecting $25M in a deal that included AppNexus buying WPP’s Xaxis for Publishers unit. The WPP-AppNexus deal was a real bargain for WPP containing some volume-based incentives for AppNexus, which could drive additional revenues for the company in the future.

AppNexus Stock Price Estimation

As presented in Chart 2 above, AppNexus was valued at $1.5B in its latest funding round, which reflected a P/S ratio of 3.9 based on a $385M TTM revenues. AppNexus’s P/S ratio is lower than those of online advertising giants like Google, which has a 6.34 ratio, or Facebook, which has 19.8. Investors in series F paid $25 per preferred share of AppNexus. Assuming investors in the last round are looking for at least a 20% upside on their money, we could see the AppNexus share price go up to $30. As AppNexus is a hot and trendy company in a steaming hot market, it can stretch its multiples to match those of the online advertising leader Google; this could boost the AppNexus share price up to $40 in a potential IPO. I believe AppNexus will want to offer some discount similar to Google's and set its IPO price range at $30–$35. At this stock price and with this valuation, AppNexus is an attractive buy.

Conclusion

Ad-tech market leader AppNexus is planning to go public this year, with a valuation of $1.58B to $2B. AppNexus, which controls more than 30% of the ad-tech industry, is backed by tech giant Microsoft and advertising giant WPP, which holds 15% of the company and has a strategic volume incentive plan in place with AppNexus. As the online advertising market is expected to grow, so will the ad-tech market, and AppNexus is well positioned to monetize this rise from its leadership position. With a price range of $30 to $35 per share and an attractive P/S ratio, the AppNexus IPO will be a good investment.

Disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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