I have followed IZEA Inc (OTCMKTS:IZEA) for years. It has been an interesting and frankly disappointing story to date. Yet nine years after inception, the company is finally positioning itself as a legitimate acquisition target that could materialize within the next 24 months. I am cautiously optimistic. I also want to present a balanced history of this OTC stock, including its run-ins with stock promoters and long history of shareholder dilution.
From 2011’s $5+ to today’s $0.50/share, IZEA (OTCQB: IZEA) will probably never make good to all of its shareholders. Yet for investors who are examining IZEA for the first time, there is a feasible opportunity to earn an attractive return from here. Readers should weigh that opportunity against the risks.
To be specific, Craig-Hallum has a $1/share price target on IZEA, which I believe is reasonable. I believe this opportunity should be weighed against approximately 50% downside risk. At half today’s price, IZEA would have difficulty raising further capital and thereby be forced to slash its salesforce and engineering expenditures in order to simply sustain a profitable business, rather than continue pursuing its hypergrowth goal.
* Ladenburg Thalmann has a $1.20/share price target (my PDF copy is dated 4/24/2015).
* Merriman Capital has a $0.60/share price target (initiation at $0.50 on 1/9/2014 and subsequently raised to $0.60).
* SeeThru Equity has a $0.80/share price target (my PDF copy is dated 5/8/2014).
* Craig-Hallum has a $1/share price target (my PDF copy is dated 3/20/2015).
THE BULL CASE
* The growth metrics speak for themselves.
* Focus on scale and liquidity is paying off with a network effect cascade.
* Focus on growth before profit is purposeful; the buyout motivations of IZEA’s new VCs are obvious.
* Value play at $28M market cap generating $23M in revenue with ~50% gross margins.
THE BEAR CASE
* Company’s history has been filled with delays and dilutive share offerings.
* Early ties to stock promotion have damaged management credibility.
* Despite success outpacing smaller peers, the final tier of competition (Facebook, Twitter) is fierce.
Before I dig deeper into these points, let me first orient readers to the company and review the financial expectations for 2015.
IZEA operates two marketplaces. It charges a fee whenever a transaction occurs.
1) IZEAx: IZEA charges a fee whenever an advertiser pays someone to create sponsored content through its marketplace (e.g. a tweet containing Coca-Cola, a blog discussing McDonald’s, or a Facebook post containing M&Ms).
2) Ebyline.com: IZEA charges a fee whenever someone hires one of the 12,000 freelancers at Ebyline.com.
CURRENT YEAR EXPECTATIONS
IZEA (OTCQB: IZEA) beat estimates for Q4 2014 with higher than expected revenue and gross margins, with lower than expected sales and marketing expenses. It beat top and bottom line estimates. Adjusted EPS was ($0.02), which excludes a $0.04 gain on warrant revaluation. Registered users at IZEAx grew 153% YoY, revenue grew 26% YoY, gross profit margin grew 56.5% YoY, and booked orders grew 40% YoY. The company projects 176% YoY revenue growth in 2015. Bulls will point to these growth metrics as evidence that IZEAx is reaching a tipping point; bears will highlight the fact that it has taken almost a decade to get here.
Q1 2015 results were even more positive. Registered users at IZEAx grew 792% YoY, revenue grew 101% YoY, gross profit margin grew 29.6% YoY, and booked orders grew 155% YoY.
Based on the company’s projection of $23M for total 2015 revenue, it seems like two-thirds will come from IZEAx and one-third will come from Ebyline.com.
Again, IZEAx is a marketplace where advertisers can purchase sponsored articles, blog posts, Tweets, YouTube videos and Facebook updates. IZEAx connects advertisers to the people who post the content and ensures that compensation is disclosed (“#ad” or “This article was sponsored by Audi”). IZEA charges a fee for every transaction. IZEAx had average gross margins of 65% in 2014. IZEAx generated $8.3M in 2014. Craig-Hallum estimates this to grow 70% in 2015 to $14.1M.
The remaining one-third of revenue this year is estimated to come from Ebyline.com, a website for hiring freelance writers and visual artists (similar to Freelancer.com) that generated $8M in 2014 sales. IZEA acquired Ebyline.com in February. I assume gross profit margins at Ebyline.com are around 10%, although Ebyline.com has never disclosed its gross margins. Ebyline.com generated $8M in 2014. Craig-Hallum estimates this to shrink slightly to $7.2M.
(I am not sure why Craig-Hallum estimates Ebyline.com revenue to shrink in 2015. Perhaps analysts assume there will be merger-related delays while Ebyline.com integrates into a new company culture at IZEA. Note that Craig-Hallum’s $21.3M top line estimate for 2015 assumes that IZEA will miss its target of $23M anyway, so Craig-Hallum’s outlook is slightly conservative.)
Although I think IZEA (OTCQB: IZEA) will achieve its $23M revenue forecast this year, I agree with Craig-Hallum in the two-third vs. one-third estimates for revenue contributions from IZEAx vs. Ebyline.com, respectively. Note that Ladenburg Thalmann estimates $22M for 2015 revenue, or $1M less than the company’s official forecast.
Based in Orlando, IZEA reflects the eye-popping colors and over-the-top attractions of its hometown. Its Silicon Valley-esque office is filled with 100 (mostly young) startup types typing at Apple computers during the day and hanging around to riff on art, music or entrepreneurship after-hours. Aptly summarized by the Orlando Sentinel, “The result is a wow office with all the colors of the rainbow.”
CEO Ted Murphy founded and has led IZEA uninterrupted for approximately nine years. He has been a guest on CNBC, Bloomberg, Fox, CBS, E! and ABC. Type his name into any image search engine to easily see his colorful, zany personality.
No one can deny Murphy’s remarkable success raising cash to build his content marketing platform- his singular professional goal for a decade. He has built the platform from a handful of bloggers writing sponsored posts (à la “Awesome Desserts Using Hershey’s Syrup- Sponsored by Hershey’s”) into a global content advertising platform with 446,000 registered users, including Wall Street Journal journalists.
On the other hand, Murphy’s cash-raising has unfortunately come at the expense of common shareholders. IZEA’s share count has multipled several times since the company went public in 2011, with a total accumulated deficit as of December 31, 2014 of $22.9M. (Remember that accumulated deficit is an accounting item, not a current debt obligation. IZEA is debt-free.) Yet due to a $12M raise completed last year, and it entered 2015 debt-free and entered April 2015 with $3.9M in cash. IZEA also has an untapped $5M credit facility with Bridge Bank.
The content marketing industry generates $44B annually. The online mobile ad industry generates $19B annually. With just $23M in revenue this year, market saturation will not be a problem for IZEA during the foreseeable future.
Direct IZEA competitors include Ad.ly, SheKnows Media, Speakr, and smaller networks that usually focus on celebrity posts. Yet IZEAx’s 446,000 registered users make it the largest marketplace by orders of magnitude from its competitors. SheKnows Media has a few hundred celebrities and only 24,000 total creators; Ad.ly has about 5,000 celebrities and only approximately 80,000 total creators. At its current scale, IZEAx is beginning to compete with blue chips like Facebook’s Boost, Yahoo!’s Gemini, Twitter’s MoPub, or The New York Times’ Paid Posts.
Bulls will argue that IZEAx has plenty of room to grow, offers a cross-platform solution for buying a variety of ad types, and will succeed as a “one stop shop” for advertisers. Bears will argue that the deep pockets and reputation of Facebook, Yahoo!, Twitter et al. will lure advertisers, worth their trouble to create and manage separate accounts inside each network.
In terms of broad sentiment, the general attitude toward sponsored content has taken a cultural shift in the past 12-24 months. Sponsored content is becoming mainstream. Consumers are starting to not mind whether articles, tweets, and other types of content that they consume are or are not advertisements. Fueling this shift has been the rapidly improving quality of sponsored content, often reaching parity with uncompensated content. Indeed, according to Forbes’ Mark Howard, sponsored content reaches a comparable number of readers as unsponsored content. “There’s no statistically significant difference. The social web is a meritocracy,” Howard has declared. Consumers rarely mind if content is sponsored or unsponsored by a brand.
Some final statistics: 1) Native ads are currently the most effective type of advertising versus TV, radio, magazine, newspaper and online display ads [Halverson Group], 2) 60% of consumers have a favorable view of native ads. [Yahoo!], 3) Mobile native ads are viewed 53% more frequently and generate 500% higher click through rates than mobile banner ads [OPA/Sharethrough].
Per the most recent 10K, insider ownership at IZEA is extremely high. Institutional shareholders (mostly VC types) beneficially own approximately half of the company, and executive officers and directors beneficially own an additional quarter. Major shareholders include Murphy (founder), John Pappajohn (legendary VC), Brian Brady (VC), Nexstar CEO Perry Sook and seven institutional LPs.
As I mentioned, IZEA is conscientiously spending money to increase scale as rapidly as possible. Profitability is not its immediate goal; its VCs would not be happy if it was. IZEA’s singular goal is to build the largest and most liquid marketplace at IZEAx as fast as it can. Certain business models are best as VC-backed, hypergrowth, reach scale first, turn on revenue later businesses. Marketplaces are precisely this type. Uber, Facebook, AirBnB… all of these marketplaces spent tons of money during their formative years to achieve scale, purposefully aiming to become profitable many years later.
Investors looking into IZEA (OTCMKTS:IZEA) should obviously look into the fully diluted valuation of the company, which I have calculated from in-the-money warrants and options, pleasantly surprised at the small difference between IZEA’s market cap and fully diluted valuation: about 20%. In brief, there is a small amount of restricted stock, a small equity compensation plan, and some in-the-money convertibles in the low $0.20s.
The important portion of IZEA’s fully diluted valuation is out-of-the-money. Specifically, there are about 25M warrants at $0.50/share with various expiry dates extending to 2019. In short, while IZEA’s fully diluted value is very close to its current market cap below $0.50/share, once IZEA rallies above $0.50/share, some new tranches of convertibles will become exercisable and add a bit more overhang. If you examine the price chart on a technical basis, you will note that $0.50/share functions as overhead resistance for this reason. Out-of-the-money overhang exists at almost every public company, and I am not terribly concerned as I think the market will burn through it without too much problem. Anyway, keep $0.50/share in mind as a hurdle.
Like many penny stocks, IZEA has been promoted. Most promotions are paid by third-party shareholders who are only interested in short-term price performance to unload their position, rather than supporting the company’s long-term vision. Most penny stock promotions use sensational emails or landing pages to drive attention to the stock. Promoters recruited by these shareholders managed to spike up the price of IZEA several times. The heaviest promotion occurred in 2011-2012.
Judging from the logs on stockpromoters.com, these shareholders have mostly exited the company as Murphy has attracted a new class of VCs with Pappajohn, Brady, Sook, and the other institutional investors listed on IZEA’s latest 10K filing. Murphy has clearly upgraded the quality of his investors versus 3-4 years ago.
During his early months as a public company CEO, shareholders pretty obviously took advantage of Murphy, convincing him to give them cheap shares without telling him they were planning on pumping his young company’s stock. He lamented this on several conference call Q&A sessions in 2013 and 2014 without getting into too many specifics. Ultimately, as CEO had to take responsibility for his actions. The promotions ended up destroying a lot of shareholder value by the end of 2012, as all promotions do.
For investors looking at IZEA (OTCMKTS:IZEA) for the first time, there is some comfort in knowing that the promotion phase has already happened… over two years ago. Murphy survived the rite of passage that seems to afflict almost every penny stock CEO. Bulls will argue that this phase is behind IZEA and that the quality of its new investors is self-evident. Bears will argue that any promoted company should be an automatic no-go, or at least command the most stringent level of scrutiny.
Personally, I am comfortable with IZEA’s checkered past. I believe Murphy when he has admitted that he did not understand what he was getting into when he brought these investors on board in 2011-2012. He was young, new to the OTC markets, and they took advantage of him. The market seems to agree with me, providing a steady level of support in the $0.30s and $0.40s for several years now. The market cap of the company at just 1X sales is reasonable: cautious yet optimistic that Murphy might be able to accomplish his goal. At the same time, I completely understand the bears who argue that getting involved with a promoted stock is bad news no matter how sincere the CEO.
I leave the conclusion on this matter to the reader.
To wrap up, the growth percentages at IZEA are double- and triple-digits across the board: users, revenues, margins, bookings. The company’s focus on scale and liquidity is paying off with a “network effect” cascade, or a “tipping point” in Malcolm Gladwell lingo. Growth rates are going parabolic as advertisers recruit fellow advertisers, and creators recruit fellow creators.
Although profitability is not the company’s goal in the near future, I believe the new VC backing and low price-to-sales valuation could make IZEA an attractive acquisition target within 24 months.
Pursuing scale and liquidity while purposefully delaying profitability, the company’s trajectory is startup-esque and clearly headed toward a goal of acquisition. It seems like the VC backers mentioned above are pushing for hockey stick growth metrics so the company can be shopped. Yahoo! is the likely suitor with CEO Mayer’s aggressive MaVeNS acquisition strategy (Mobile, Video, Native, Social).
From the bears’ perspective, IZEA’s history has been filled with delays and dilutive share offerings. Murphy has been trying to build a global marketplace for almost a decade, and he has has only registered 446,000 users. No denying his persistence, but perhaps the growth is taking too long. Also, the run-ins with stock promotion, despite a few years having passed since the heaviest promotion of 2012, makes it generally difficult to trust the company. Finally, the competiton of major sponsorship platforms inside Facebook, Twitter, et al. could delay IZEA from attracting a major buyout.
By Sam Rae from Diaryofacurrencytrader.com
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