News Analysis date published New: 
Friday, March 4, 2011 - 11:00
New Date created: 
Friday, March 4, 2011 - 12:27
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Friday, March 4, 2011 - 11:00

This Recent IPO's Market Could Grow by 17,000%

Friday, March 04, 2011 11:00 AM

Who doesn't want to buy a stock and see it become a multi-bagger -- one that delivers not just a double-digit gain, but triple digits or more? But to find one, it means having to think differently when approaching a stock.

In the early years, these companies often have big losses and small revenue. There will certainly be some losers among the group -- companies with businesses that just don't pan out, or those that had a good idea but failed to execute. To be successful, an investor should be often like a Silicon Valley venture capitalist -- that is, those from the top tier.

One prime example is Sequoia Capital. The venture capital firm has invested in breakout companies like Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG), Oracle (Nasdaq: ORLC), Cisco (Nasdaq: CSCO), LinkedIn and YouTube. The result: about 19% of the value of the tech-heavy Nasdaq is from Sequoia-funded companies.

So how does Sequoia find its opportunities? Well, the firm's founder, Don Valentine, recently gave a speech on the topic. His main focus: find the next massive market.

It's a simple concept, but it makes a lot of sense. Hey, can you really have a big company if the market is small? Of course not.

OK, so to test this out, I've been looking at an area of the investing world that usually has young companies gunning for mega markets -- that is, initial public offerings (IPO). And yes, there's one that caught my eye: Velti (Nasdaq: VELT). The company went public in late January and issued shares at $12 each. The market cap is now roughly $679 million.

Velti got its start back in the mid 1980s and has since undergone several transformations. But in the past few years, the company has been focusing on the hyper-growth market of mobile advertising.

How big is the opportunity? Actually, when I looked at the market forecasts, I thought there was a mistake: a report from ABI Research predicts mobile advertising will surge from $1.64 billion in 2007 to a stunning $29 billion by 2014.

Then again, the fact is that the worldwide demand for smartphones is increasing at a rapid rate [for more on this, you can check my recent piece, "3 Stocks in a Market with Exponential Growth"]. The number of smartphone shipments is forecasted to go from 600 million units to 1 billion units this year alone.

For major brands, mobile advertising is a great way to find and engage with customers. It is also different from other mediums -- like TV and the Internet -- since smartphones are available to deliver advertising virtually anytime, anywhere.

Velti is nicely positioned to benefit. The company has built a sophisticated mobile marketing platform that helps manage campaigns. It is essentially a one-stop shop: Velti makes media buys, designs mobile apps and even tracks campaigns with analytics. Velti also tries to integrate with other media such as TV, radio and print. Some of Velti's customers include AT&T (NYSE: T), Vodafone, Johnson & Johnson (NYSE: JNJ) and McCann Erickson.

Velti has various streams of revenue: subscriptions, licensing and managed services. For the nine months ended September of 2010 (fourth quarter results have not been reported yet), total revenue came to $58.8 million, up 143% compared with 2009.

No doubt, Velti has tough rivals. Two key direct competitors -- at least for mobile advertising networks -- are Google and Apple. In the past year, Google shelled out $750 million for Admob and Apple paid $275 million for Quattro Wireless to enter this growing market.

But competition is to be expected. However, Velti stands out because it has a comprehensive offering. In fact, its global scale is particularly attractive to major brands.

Action to Take ---> As should be expected, Velti increased its expenses to keep up with the growth. For the first nine months of 2010, sales and marketing spending went from $10.9 million to $17.1 million, while research and development rose from $2.5 million to $4.6 million. But if you factor out depreciation and one-time charges (such as from acquisitions), the company was still able to produce adjusted EBITDA of $4.7 million during this period.

But for investors looking for the next big growth play, earnings are not the key metric. Instead, the focus is on revenue growth.

For example, Velti's price-to-sales (P/S) ratio of 5 is quite reasonable. Other mobile tech players like Motricity (Nasdaq: MOTR) and Synchronoss (Nasdaq: SNCR) trade at multiples of 4 and 7, respectively.

So how much can the stock go up? It would not be a stretch for it to clock a 20%-plus return for the year. Yet the long-term is really where this company could provide the best returns for investors. And if Velti can continue to grow -- and maintain profitability -- this is a stock that can increase by triple-digits in the next few years.

P.S. -- Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America's electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here's what's going on…

Tom Taulli does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.