AV1 is an early-stage technology firm which has built a best-in-class ad fraud detection and prevention software solution called TrafficGuard to address the global problem (estimated at being close to ~$100bn p.a.) of ad fraud & invalid traffic in the booming digital marketing industry.
AV1 has been built for scale, and a large amount of resource has been invested into product development and design to ensure AV1 have a top-quality product. The product is built using their proprietary big data & artificial intelligence which creates a MOAT and enables them to develop and expand on their partnership with Google, the major player in the online advertising space. The Google relationship is clearly an endorsement of AV1’s product and a natural exit strategy could be a takeover of AV1 by Google – TrafficGuard’s SaaS software has been selected as the only globally certified ad verification vendor on the Google Cloud platform.
Reinforcing the product quality, AV1 are also onboarding major enterprise level clients, such as Ladbrokes and Betbull (part of global gaming giant Wynn Interactive) in the online gaming sector and have several household brands are in the sales pipeline undertaking trials of TrafficGuard. Customers pay 1% – 2% of ad spend, so there is a direct relationship between the level of digital marketing spend by advertisers and AV1 revenue.
The heavy investment required to build the technology, IP, and business, means the business is loss making, with cash burn of ~$2m per quarter (over $30m has been invested into IT & development). AV1 management have undertaken several operational and strategic initiatives this year which are starting to bear fruit which we think could pay off in the near term.
Management and insiders play a very important role in the success of micro-cap stocks. AV1’s CEO (Mat Ratty) comes across as a slick operator, backed up by Ratty’s choice of CRO Matt Sutton who has a proven track record of scaling technology businesses. The major cornerstone investor is Mark McConnell (CEO of formerly listed cybersecurity business Citadel group, subsequently bought by private equity) who backs the business as the “next Citadel” and has a proven track record in the tech sector.
We initiate coverage on AV1 with a BUY and note that it is suitable for investors with an appetite for higher risk/reward investments given the relative early-stage of its business life cycle and small size.
Technical Charting Analysis
AV1 shares have been very volatile over the last few-years, as market has been excited by its product development and contract wins. However, because it is still in cash burn stage it has also tended to be sold off harshly. The price chart shows there is strong support at $0.095 and it is encouraging to see the stock has held up here for about 4-months, indicating to us that we are commencing coverage from a more consolidated price support base.
Reason’s We like Adveritas as a Business – in Bullet Points:
- Growing & large Market: Online ad fraud is estimated to cost advertisers $100bn by 2023
- Built by design: TrafficGuard was built to address the inadequacies of legacy anti-fraud solutions
- Validation – Proven Product: growing list of Billion-dollar companies are adopting TrafficGuard across mobile, display and/or PPC (pay-per-click) spend
- Google marketplace verification enhancing product quality and quickens due diligence process for customers wanting to onboard
- Near-Term growth to accelerate
- Google Marketplace sales channel – first mover advantage, only global ad fraud prevention software and significant sales channel
- Increased sales staff and New Chief Revenue Officer– grow enterprise clients, strong traction and pipeline so far
- CMO starting January 2022 – to push self-sign-up clients (large customer base numbers and high margin)
- Growing user base: premium user base is growing (albeit off a low base) leading to paying customers at a high conversion rate of 13%. Any company that uses PPC (pay-per-click) advertising is a potential customer
- Scalable: Substantial opportunity to scale through direct enterprise sales, channel partner and self-sign up PPC
- High Margin SAAS (software as a service) product
- Highly aligned management and board
- Valuation support – assuming next year revenue targets are met
- Significant upside from a valuation re-rate higher once AV1 moves to operating at cashflow breakeven
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