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How to Invest for the Revolution in TV Advertising

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You might have missed one of the bigger M&A deals this week, but advertisers and those in ad-tech certainly didn’t. Rentrak (RENT) agreed to merge with Chicago based ComScore (SCOR - Free Report) and the stocks of both companies launched higher. This spells trouble for another advertising metric firm, Nielsen (NLSN - Free Report) .

The Merger

Both RENT and SCOR are both Zacks Rank #3 (Hold) stocks, and both carry some pretty large forward multiples. RENT is trading for around 125x forward earnings and SCOR carries a forward multiple of more than 85x.

The merger calls for SCOR shareholders to end up with 66.5% of the combined company and RENT shareholders to hold 33.5% of the company on a fully diluted basis. The combined company expects the deal to be mildly dilutive to its Non-GAAP EPS in 2016 and accretive in 2017.

Analyst Actions

Following the deal, Needham downgraded shares of RENT to buy from strong buy and lowered their target from $85 to $60. The analyst noted that for every $1 in upward move in SCOR, RENT should move higher by 1.15x that amount.

Albert Fried upgraded their rating on shares of RENT to Market Perform from Underweight following the transaction. Analyst’s that were even slightly bearish on the firm before the deal pretty much have to move their rating to neutral as the stock could be pegged to an acquisition price. In this case it is an all stock deal, so there isn’t a designated purchase price.

The 800 Pound Gorilla

Nielsen (NLSN - Free Report) is the powerhouse in the world of advertising metrics. The company has a $16B valuation (SCOR $1.8B RENT $0.8B) and trades at a much more reasonable forward multiple of 17x.

So while this deal might not make NLSN change all that much, the winds of change are blowing in the ad tech space. Programmatic Ad Buying is spreading from the digital world to a place that still uses the fax machines for buy orders.

The question becomes, which is the best way to play this as an investment?

The Google Way

One of the reasons Google (GOOGL - Free Report) became a behemoth was that it made its customers their own service agents. The self-serve platform allowed Google to focus on refining the product, and it allowed its customers to buy what and where they wanted. This idea has finally moved to how TV commercials are being purchased.

TubeMogul (TUBE) is among the very first companies to offer advertisers the ability to buy spots on digital media as well as TV and do so via a programmatic platform. The efficiencies certainly make this an interesting candidate for publishers (TV stations) and advertisers alike.

As an investment prospect, TUBE is a Zacks Rank #1 (Strong Buy) and is young enough of a company to see sequential revenue growth continuing for several quarters to come. Aggressive growth investors love to see sequential revenue growth as explosive moves generally don’t come from companies that are seeing seasonality.

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Brian Bolan is a Stock Strategist for Zacks.com.

He runs the new Stocks Under $10 Investor service where he looks for low priced stocks that are seeing positive earnings estimate revisions. This popular service has seen some strong early returns and offers a free trial via the Zacks Ultimate service.


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