Adslot Ltd soars 25% on giant contract win: is it too late to buy?

As I wrote here previously, Adslot Ltd (ASX: ADJ) is an exciting and fast-growing media company specialising in connecting media buyers and sellers around the world on its integrated technology platform.

Adslot stunned the market on Friday after announcing its “single most significant customer contract in the history of the business”. Adslot’s shares reacted positively to the announcement, surging 25% to close within a whisker of its 52-week high.

The question investors will now ask, is whether it’s too late to buy Adlsot shares? Here is what I think.

New deal

On Friday, management announced a new long term contact with groupm to use Adslot’s Symphony platform.

Who is groupm?

According to the ASX announcement, groupm is the world’s largest media buyer with annual billings of $102 billion dollars. Groupm enables advertisers to find or create valuable audiences and achieve desired marketing outcomes. Put simply, it helps advertisers find the best place to market their product or service for sales leads.

Based on groupm’s website, it has operations all around the world with its 10 largest markets being Canada, China, France, Germany, India, Japan, Korea, Russia, Turkey and the United Kingdom (in alphabetical order). The scale of these operations allows groupm to leverage its network and find its customers the perfect advertising solution, resulting in it being responsible for one in every three ads globally.

Deal specifics

Under the terms of the multi-year contract, groupm will activate Adslot’s workflow and trading automation platform – Symphony – to deploy advertisements globally.

The deal provides Adslot with additional revenue from licence fees as and when new markets are entered, as well as providing it with an established (and significant) footprint in Europe, the Middle East and Africa (EMEA).

Adslot’s management believes the groupm contract will result in the value of media executed via Symphony to increase from around $3 billion to over $6 billion within 2 – 3 years. This bodes well for future earnings.

Company financials

Given Adslot’s Symphony trading platform is already in place, operating cash flows are relatively fixed. This was reflected in its latest trading update provided in June where cash outflows decreased by 23% for the 12 months ended 30 June 2016.

Cash receipts for the 12 months to 30 June 2016 came in at $11.3 million, a 37% increase on prior year figures. With Friday’s deal to expand its fee opportunity base, I’d expect revenues to grow exponentially from here whilst expenses remain stable.

Accordingly, I believe Friday’s announcement solidifies Adslot’s potential as a highly profitable business for the future.

Foolish takeaway

Although Google has a stranglehold on the online advertising market, companies like Adslot and recent reverse-listed market-entrant Tech Mpire Ltd (ASX: TMP) are making headway into taking market share from incumbent Google.

The new groupm deal provides Adslot with significant momentum in an industry where scalability is key, laying the foundations for its share price to soar further from here.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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