AcuityAds Holdings Inc (TSX: AT) is a technology company, which provides targeted digital media solutions, enabling advertisers to connect with their audiences across online display, video, social and mobile campaigns.

Key Investment Rationale

Illumin- A future growth catalyst for AT: It just been a year since the company launched illumin and is  changing the world of advertising and certainly changed the way Accuity is. In Q3FY21, illumin segment revenue delivered a sequential quarter growth of 42% to CAD 7.4 million.

Short-term challenges, Long-term outlook positive: In Q3FY21, the company reported a modest growth. Yes, growth was less than the street has expected to grow. One reason, it’s partly due to the legacy clients experiencing from supply chain issues. So needless to say when clients are experiencing shortage of products, they're pushing advertising less on a temporary basis until they get the supply persons back in place. And the company has seen a number of customers, their existing customers doing that and then a number of potential customers that are excited about future integration are just slowing down their plans. We all know this is a temporary issue and it will come back big time and that problem is going to be solved.

Targeting Tier-1 brands: The company is focusing since the launch of illumin on Tier 1 brand. Well, Tier 1 brands has a longer sales cycle, and the company is happy about the long sales cycle, because it means deeper integrations and much, much better relationship with those brands in the long run, and the company is going to go into that a little bit more in the future.

Risk associated

Fixing supply chain related issues at the customers’ end could take more time than expected which can have a toll on the group’s financials in short run. Further, a resurgence in the COVID-19 cases could create serious financial problems for the company. 

Financial Highlights: Q3FY21

Source: Company Filing

• Reported modest topline growth, with Q3FY21 total revenue was CAD 27.5 million, a 5.4% increase year-over-year, and an 11.3% increase on a constant currency basis. This revenue growth was achieved largely due to strong sequential revenue growth from illumin.
• Gross profit during the quarter under consideration stood at CAD 14.3 million , a 5.4% increase compared to CAD 13.5 million for the third quarter of 2020.
• In Q3FY21 the company’s reported net Income was CAD 3.4 million for the three months ended September 30, a whopping 265% increase compared to net income of CAD 0.9 million for the same period in 2020
  

Valuation Methodology (Illustrative): EV/Sales-Based Valuation

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks

Stock Recommendation

The company reported decent performance in Q3FY21, how topline growth missed the consensus estimates that brought a sharp plunge in the stocks on November 03, 2021. However, the company has delivered such an amazing quarter of growth for illumin.  The company is best positioned it’s ever been. And now the company has the ability to think long-term and start focusing on bigger clients.

Also, they are also focusing on the business operation as they are enhancing their executive team to make sure we have the right focus and alignment.

However, given the penny-cap market categorization of the company, investors are exposed to a wide variety of risks mentioned above.

Therefore, based on the above rationale and valuation done using the above methodology, we recommend a “Speculative Buy” rating on the AT stock at the closing price of CAD 5.03 (November 11, 2021).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Analysis Summary

Technical Price Chart (as on November 11, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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