TM Editors Note: This article discusses a penny stock/microcap. Such stocks are easily manipulated; do your own careful due diligence.
Though social media advertising is all the rage these days, IZEA (IZEA) remains a rather obscure stock despite the phenomenal growth it is generating. The company is developing a network of content creators that match up with brand advertisers to generate sponsored social ads.
The company remains relatively small and under the radar of the general social media and advertising plays. The recent weakness in display ads plays into the native advertising concept of IZEA. By matching “influenzers” with sponsored ads, brands are better able to communicate the message that is typically lost in a picture display cluttering up a web page.
For a small cap, the company has a compelling valuation, but it is still in the early stages of sponsored social ads. IZEA interestingly has a couple of analysts forecasting significant price gains. The question is whether the company can obtain enough scale to attract not only investors, but also ensure that it isn't eventually crushed by another social advertising concept.
The stock is compelling enough and relatively small, but a big hurdle exists to overcome some of the red flags from the past.
Not So Impressive Corporate History
CEO Ted Murphy founded the company all the way back in 2006 under the name PayPerPost, Inc. The company was clearly early to the sponsored ad concept and toiled around while the other social media companies saw revenue soar. The name was eventually changed to IZEA and the company went public in 2011 via a reverse merger for the first red flag. The next major negative was a 1-for-40 reverse split in 2012.
IZEA now runs the IZEA Exchange, or IZEAx, to handle the process of matching brand advertisers to content creators with influence over a social media following. The brands pay for sponsored ads placed within social media of all the top social media platforms.
Earlier this year, IZEA purchased Ebyline to add a group of professional journalists to add to the existing content creators.
Improving Financials
The actual corporate numbers are finally starting to show signs of acceleration. IZEA has a listed market cap of only $20 million (before the warrant dilution), yet the company expects to produce revenues of $23 million for the year. It is rare to find a growth stock trading at less than 1x sales, especially one growing revenues beyond the market growth rates.
For Q2, the company already pre-announced that bookings would grow 140% YoY. Part of the gain is from the recently purchased content firm Ebyline, while the historical sponsored social sales surged 49%. In total, the pro-forma revenues are a tad over $16 million.
For Q1, IZEA produced 111% revenue growth to reach $4.1 million. This number isn't exceptionally meaningful considering the growth rate and the acquisition of Ebyline during the quarter. As mentioned in the above bookings growth, revenue going forward will accelerate from the $4 million level.
The revenue acceleration that is taking place this year in part due to the Ebyline business. The company though wasn't producing the type of growth one would expect while social media was soaring during that time period.
In the short term, margins will be lower due to the higher content costs of the Ebyline product and the push for growth. While IZEA produced gross profits of 41% in Q1, the guidance is for a further reduction to the 30% to 35% level in the current quarter due to a full quarter inclusion of Ebyline. The company though projects an increase in the future as the Ebyline margins were only 10% in Q1 and have already bounced from the 7% reported last Q1 prior to the merger.
