With the rise of social media and the ease and speed with which consumers can give a favorable or unfavorable review of a product, advertisers are looking to engage their customers in ways never imagined before. The company that can connect companies and their products with their customers the fastest and most efficiently has the best chance of emerging as the leader in the digital advertising market.

The real key for success in this market lies in the software as a service (SaaS) business model. SaaS is most commonly associated with cloud computing because the software is hosted in the cloud. This allows companies to reduce their overall IT support costs because everything is handled by the SaaS provider.#-ad_banner-#​

So what company is at the forefront of combining SaaS and digital advertising? The answer is Bazaarvoice (Nasdaq: BV), which runs a network that connects brands and retailers with the voices of their customers. 

Each month, more than 400 million people share and view opinions and experiences about the millions of products in the Bazaarvoice network. Using Bazaarvoice network analytics, various marketers and advertisers can increase their brand awareness, ideally leading to increased sales.

In its fiscal second quarter, Bazaarvoice posted a loss of $0.06 a share, but that beat expectations for earnings per share (EPS) by a penny. However, revenue rose 17.9% from the same quarter the previous year. 

Bazaarvoice also added 50 new active enterprise clients during the quarter, bringing its total to nearly 1,300, with average annualized SaaS revenue of $140,000 per client and a retention rate of nearly 97%. In addition to its active enterprise clients, Bazaarvoice had more than 1,900 active network clients at the end of the second quarter. 

Bazaarvoice also has a new CEO at the helm: company President Gene Smith, who has been in the technology industry for three decades, with the past decade-plus in the SaaS space. Smith took over as president in May and had been handling worldwide marketing and business development activities. 

Bazaarvoice has several growth initiatives in place, including a focus on better sales execution and expanding capacity, that should lead to a rise in bookings. The company has also been building its enterprise and small- and midsize business teams. 

These initiatives also now include building the company’s international teams in Europe and the Asia-Pacific region. In October, the company launched Bazaarvoice Japan. Global expansion into the Asia-Pacific region is key for the company, and Japan is a great launching point.

Bazaarvoice works with nearly three-fifths of the merchants in the Internet Retailer Top 500 Guide and with 44 Fortune 100 companies. Recent new clients added include Exxon Mobil, Hyundai, Del Monte and Church & Dwight, and Bazaarvoice is also seeing additional growth from the likes of Nestle, Whirlpool, Johnson & Johnson, Epson and Samsung.

However, there are issues facing Bazaarvoice. For one, the company just wrapped up its antitrust trial with the Department of Justice over its 2012 acquisition of PowerReviews. The Justice Department is seeking to break up the deal because Bazaarvoice acquired its only true competitor. The company is awaiting the verdict, and the worst-case scenario is that Bazaarvoice will have to dispose of PowerReviews.

Risks to Consider: In addition to the uncertainty over its PowerReviews acquisition, another key risk is that the company is behind schedule on migrating its clients fully to its new conversations platform. Bazaarvoice’s media business is not performing as well as could be.

Action to Take –> Buy Bazaarvoice for upside to $13.50. It trades at only 3 times sales and 2.4 times its book value. Compare this with SaaS competitors Splunk (Nasdaq: SPLK), at 26.8 times sales and 28.7 times book value, and ServiceNow (NYSE: NOW), at 18.7 times sales and 24.3 times book. Bazaarvoice has $1 per share in cash and no debt, and a price-to-sales multiple of 5 on the company’s projected 2014 sales of $206 million suggests a price target is $13.50, or upside of 90% from current levels.

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