Why Taptica rallied 162%

It's a big day for Taptica. Floated on AIM in 2014, the Israeli firm is back above its IPO price for the first time in 18 months. Demand is driven by blockbuster first half results and a special dividend, with bosses bullish on prospects for the full-year. No wonder the shares surged by 29% Wednesday.

Taptica's clever software allows advertisers like Amazon, Disney, Facebook and Twitter reach the right market via mobile devices. This work helped revenue increase by 53% to $51.8 million (£39.6 million) in the six months ended 30 June.

That swelled adjusted cash profit to $9.2 million from $2.8 million a year ago, and pre-tax profit sixfold to $6.85 million, giving bosses confidence to pay a one-off dividend of 5.79 cents, or 4.4p a share.

We'd been told back in July that business had been better than expected, largely due to surprisingly high margins on campaigns run for clients. Gross margin rose from 26.4% to 34.4% in the six months, and chief executive Hagai Tal tells Interactive Investor he's "comfortable" to say Taptica will achieve "at least what we did in the first six months".

Steve Liechti, an analyst at Investec Securities, keeps sales estimates for this year unchanged at $111 million, up from $75.8 million in 2015. But he thinks Taptica will more than double cash profit to $18.4 million, up from his previous estimate of $17.7 million, and grow underlying earnings per share from 8 cents to 21.1 cents. He'd pencilled in 20.2 cents before.

"Our 2017 forecasts are unchanged though now look conservative," admits Liechti.

Taptica's first half certainly vindicates a decision to target mobile advertising rather than the web, a move aided by the $17 million acquisition of AreaOne in September last year. Mobile business now accounts for 79% of revenues versus 51% in the first half of 2015.

It's been a long slog, however, and the share price slumped by two-thirds last summer after the firm, then known as Marimedia, warned its decision to shift emphasis from the display business would damage revenue.

"As we went into mobile, we were strong, but focusing on Tier One clients took time," Hagai Tal explained to Interactive Investor. "We've now proved ourselves and it’s easier to attract new advertisers."

That includes giant US retailers, which are increasingly focused on mobile ads. "The whole market is growing, and this is just beginning," reckons Hagai Tal. "They haven’t moved all their budget yet, but understand they need to engage with potential customers on mobile. Once they see the light, they start to shift their business."

Marimedia floated in May 2014, raising £29.8 million via a placing at 153p. Two months later it bought the Taptica business whose name it took the following year. After hitting a low of 57p last summer, the share price has soared from just 63p in June to a high of 165p Wednesday, a gain of 162%.

At that level, the shares trade on a forward price/earnings (PE) ratio of 10.2 times, dropping to single digits based on 2017 estimates.  That doesn’t sound expensive, and it's not, but the market has been reluctant to rate Taptica more highly given its track record, preferring instead to see how the transition to mobile goes.  

It's gone well so far, and investors are clearly happy to pay much more for the shares. As that track record improves, so too should the rating. 

Investec has raised its price target to 160p based on today's results, but clearly there is room for further upside if the second half goes as well as Taptica predicts. As Investec says, their forecasts could be conservative.  This is an exciting business, but at these elevated levels is a 'buy on the dips' for brave investors only.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.