IZEA Inc (OTCPK:IZEA) will generate $23 million in revenue this year, which is greater than its current market capitalization. It raised $11 million in cash from existing warrant holders this summer, a substantial vote of confidence from institutional investors. It already operates the largest platform-agnostic sponsored ad platform and is increasing its headcount by 19% to further strengthen its industry dominance. Despite a current market capitalization of $21 million, Ladenburg Thalmann estimates that IZEA could generate $38 million in revenue with 36.8% gross profit margins in 2016, positioning IZEA to qualify for a NASDAQ uplisting.
What follows is an in-depth look at an underfollowed stock. IZEA is debt-free, majority insider- and institutional investor-owned, operates an infinitely scalable business, and has achieved double-digit growth rates across every major financial metric during the past three years without fail (revenues, margins, number of users and bookings). Nevertheless, it trades on the public market at a valuation of less than 1x annual sales.
Respected analysts like Ladenburg Thalmann and Craig-Hallum agree that IZEA is undervalued. Their current price targets are $1.20 and $1.00 per share, respectively. If IZEA were to attract a valuation commensurate with today's Silicon Valley ad/tech platform companies, its shares would re-rate 200-400% higher from current levels.
No Dilution, Debt Free and Plenty of Cash
On July 20, IZEA announced that it would receive $11 million cash proceeds from existing warrant holders, who agreed pay IZEA cash to receive shares of stock. Because these warrants were already issued and outstanding, this action was non-dilutive (exercising in-the-money warrants does not increase fully diluted valuation).
This action was also a substantial vote of confidence when viewed as a percentage, as the $11 million represented 52% of IZEA's market capitalization. In other words, institutional investors felt comfortable that IZEA's common stock market would have enough liquidity to support a 52% increase to the number of shares outstanding.
Positioning themselves to benefit from an acquisition or NASDAQ uplisting, these institutional shareholders likely had little fear of dilution through 2016, because IZEA:
- Is debt-free,
- Exited Q1 2015 with $3.9 million in cash,
- Just raised another $11 million in cash without diluting shareholders,
- Needs no cash through at least 2016,
- Has an untapped $5 million credit line,
- Is on track to increase revenue 176% this year, and
- Should generate more than half its market capitalization in gross profit next year.
Value Play
The market capitalization of IZEA is currently $21 million, a relatively low valuation as a result of a general lack of investor awareness of the company. Able to display sponsored content to 1/3 of the world's population, IZEA is the largest platform-agnostic sponsored ad platform in the world. Yet IZEA trades at less than 1x sales, despite comparable acquisitions such as:
- Adapt.tv by AOL for 18x sales
- Power Reviews by Baravoice for 8x sales
- Meridian by Aruba Networks for 25x sales
- Amobee by Singapore Telecom for 22x sales
Traditional investors might point out that IZEA is operating at a loss after accounting for expenses, but this is purposeful. IZEA is aggressively hiring to maintain its dominant industry position, which is the same Silicon Valley approach as Uber, AirBnB, Instagram and Facebook.
Ladenburg Thalmann estimates IZEA's revenues to reach $38 million during 2016, which means the entire company is currently valued at roughly half the revenue it can generate within a single year.
Purposefully Delayed Profit
As modern investors should understand by now, profitability is not — and should not be — the goal for technology companies while they are acquiring customers with long lifetime values. Had Uber, AirBnB, Instagram or Facebook limited their expenses during their formative years, they would never have achieved billion-dollar valuations. CEOs of technology companies understand that it is wise to spend $3 today to acquire a customer with a $7 lifetime value, even if it takes a few years to capture that $7.
Venture capitalists are happy to spend money acquiring customers now, even if it means the company cannot claim to be profitable right now. It is for this reason that IZEA is purposefully operating at a loss; IZEA is acquiring long-term customers. Aptly summarized by another journalist,
Pursuing scale and liquidity while purposefully delaying profitability, the company’s trajectory is startup-esque and clearly headed toward a goal of acquisition. It seems like the VC backers mentioned above are pushing for hockey stick growth metrics so the company can be shopped.
Expanding Aggressively
As mentioned above, IZEA operates the largest platform-agnostic sponsored advertising platform in the world. Scale (liquidity) is IZEA's competitive advantage. Brands can use IZEA to buy up to 2.7 billion impressions on YouTube, Instagram, Facebook, Vine, Periscope, Twitter or blogs.
Every one of the top five consumer goods brands is a client of IZEA. Over 450,000 creators can place a product or service into their content streams through IZEA's platform. For example, brands can buy a tweet from Mark Cuban, a Facebook post from Floyd Mayweather, an article on Business Insider or an Instagram from Hilary Duff. IZEA has brokered 3.3 million such placements for thousands of brands since 2011.
To maintain its dominant position, IZEA's is hiring currently sales and engineering personnel that would increase its 100-person team by 19%. Assuming IZEA continues increasing revenue by millions of dollars annually, it will have plenty of cash to fund payroll. (Management stated in the latest quarterly report that IZEA has enough cash to fund operations through 2016.)
Conclusion
IZEA's stock price is currently $0.36 per share. The stock has earned Buy ratings from four analysts with price targets spanning from $0.60 to $1.20 per share. Top- and bottom-line growth has been consistent for three years.
There are several catalysts that could re-rate the stock price higher within 12-24 months:
- According to Ladenburg Thalmann, IZEA should generate $38 million in revenue with 36.8% gross profit margins next year, despite its current market capitalization of just $21 million. This is the most important catalyst of all: quarterly earnings reports.
- With its recent $11 million cash raise, IZEA is pursuing NASDAQ's shareholder equity standards in order to uplist.
- Several notable venture capitalists including John Pappajohn and Perry Sook have already invested in IZEA and are introducing the company to acquirers.
Comparable public companies in the advertising technology sector trade usually trade at higher price-to-sales multiples than 1x. For example, Coupons.com is valued at roughly 4x its estimated sales in 2015. Yelp and Weibo are both valued over 6x. IZEA trades at less than 1x.
