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TubeMogul's Explosive Potential and Risk is Upon Us
Fundamentals Technicals | Support: 11.39 | Resistance: 14.52    
➜ TUBE generates $0.97 in revenue for every $1 in expense, which is an operating loss and considerably below the sector average of $1.07.
➜ TUBE generates $275,000 in revenue per employee which is below the sector average of $346,000.
TUBE crushed earnings on August 10th, beating both revenue and EPS consensus estimates, handily.
The company provides self-serve software that allows advertisers to plan, buy and measure the effectiveness of video ads. The company website reads, "TubeMogul's advertising solution is powered by the company’s unprecedented data platform that tracks billions of video streams every month from the Internet’s top publishers. This unique technology enables TubeMogul to help advertisers find consumers who want to watch their videos – and watch them longer."
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TUBE is innovating in an advertising space that is booming. Let us not forget that Google (GOOGL) reported in summer of 2015 that watch time for YouTube rose 60% in the second quarter and the video service had more viewers aged 18-49 on mobile alone than any U.S. cable network. So, video is a huge segment for advertising growth. The bearish thesis for TUBE surrounds competition from many firms, first and foremost, from Google (GOOGL), which has already taken a large client from TUBE.
TUBE's revenue (TTM) has risen for more than five consecutive quarters. One year ago the firm reported $86 million
in revenue. For the most recent year it reported $139 million, good for a 62% one-year rise.
But, TUBE only generates $0.97 in revenue for every $1 in expense, has negative net income (a loss) and negative free cash flow. The firm is spending on R&D, which is easily (and I believe, rightfully) spun as good news, and in fact the company is at all-time highs in R&D expense.
The average estimate for next quarter's revenue of $47.8 million is above last quarter's $45 million.
TUBE's -6.70%
drop today has a material impact on its technical outlook.
TUBE has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.
Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
| EARNINGS ESTIMATES | |||||
| Earnings Date | EPS | Revenue (Mean) | Revenue (Median) | Last Quarter (Actual) | |
| 2015-11-12 | $-0.24 | $47.8 | $47.4 | $45 million M | Provided by ZACKS |
Let's look at the core elements that drive the company's fundamental rating.
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Fundamentals Rating Summary |
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Revenue (TTM US$ Millions) | 139 | 86 |  | |
| Operating Margin (QTR) | 0.97 | 1.06 | 0.86 | FALLING |
| Net Income (TTM US$ Millions) | -14 | -2 | FALLING | |
| Levered Free Cash Flow (TTM US$ Millions) | -26 | |||
| Research and Development (US$ Millions) | 10 | 5 | 3 | |
| Research and Development Expense/Revenue | 0.209 | 0.172 | 0.222 | RISING |
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| Stock Returns and Chart |
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Before we dig into the fundamental trends that drive the rating, let's look at the all-time stock chart with 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.
| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Revenue (TTM US$ Millions) | 139 | 86 | |
This is the good news and most compelling part of TUBE's story. Revenue (TTM) has increased for at least five consecutive quarters which triggers a "trend" (in this case it's seven consecutive quarters). When a company grows revenue 62.4% year-over-year, we must recognize the added importance of top-line growth, perhaps even above and beyond earnings, free cash flow and margins. Regardless of the low 2 fundamental (star) rating, if revenues continue to explode, everything could follow suit for TUBE.
What do all these numbers mean?
TUBE's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the five+ consecutive quarters of an upward trend in revenue benefited the fundamental (star) rating.
Let's look at Revenue (TTM US$ Millions) in the chart below.
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Operating Revenues/Operating Expense | 0.97 | 1.06 | 0.86 | FALLING |
This ratio (which simply represents how much revenue is generated per one dollar of expense) must be at a minimum above 1.0 in order for a company to turn an operating profit. For the latest quarter TUBE showed a ratio of 0.97. That $0.97 of revenue for every $1 of expense is actually up from last quarter's number of just $0.84, so the most recent earnings report did show a substantial improvement quarter-over-quarter. But, a year ago the company was generating $1.06 for every $1 in expense, so year-over-year we see a rather substantial decline.
What do all these numbers mean?
One year ago Operating Revenues/Operating Expense was 1.06. In the last year we can see operating margins are decreasing and less than 1.0 for the most recent quarter (below the critical level).
TUBE's fundamental rating was affected from the operating margin numbers in the following ways:
1. The current value is below the critical 1.0 level (the firm generates an operating loss).
2. The one-year change was negative (lowers the rating).
Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Net Income (TTM US$ Millions) | -14 | -2 | FALLING |
Net Income (after tax profit) over the trailing twelve months (TTM) for TUBE is falling and is negative. The $14 million loss over the last year is in fact an all-time low for TUBE, although the quarterly number ticked up in the latest earnings report.
In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the orange line. Note the falling bars from a year ago (four quarters ago) and the up tick in the most recent quarter in the orange line.
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Research and Development (US$ Millions) | 10 | 5 | 3 | |
Normally we look at free cash flow, but it would be a bit of the hitting the same beat a few too many times. Suffice it to say, free cash flow is negative for TUBE, like earnings.
Let's turn to Research and Development (US$ Millions), which trending higher meaning that for at least five consecutive quarters it's been rising (in this case it's been ten consecutive quarters). There is a tendency for some firms to slip stock based compensation expense into R&D which can be quite misleading.
R&D in the most recent quarter for TUBE was $10 million, which is a 92% increase from last year's value and nearly 240% higher than two-years ago.
Interestingly, if we look over a period of one year, we see that R&D per dollar of revenue is also increasing. R&D per dollar of revenue for the latest quarter is $0.21. Last year this measure was $0.17 (it's also rising).
In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the orange line. Note the rising bars from one-year ago.
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Summary
TUBE has seen explosive revenue growth, breaking all-time highs (TTM) for every quarter it has been public. The company is also pouring money into R&D, breaking an all-time high for ten consecutive quarters. The video advertising segment is gigantic and may in fact be the most compelling part of the advertising segment in general. That's the good news.
The bad news surrounds mounting losses and negative free cash flow, as well as an operating margin that is below 1. We should take note of the quarterly increase in operating margins, wh9ch has the firm right on the edge of turning an operating profit. This is a compelling company, in a young and exploding segment. The risk sits squarely in execution and of course, competition.
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