Rocket Fuel Delivers High-Octane Gains

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Rocket Fuel Delivers High-Octane Gains

By Richard Robinson, Ph.D., Equities Analyst

Several stocks posted gains in Thursday’s session on better-than-expected earnings reports, but perhaps none caught investors by surprise more than Rocket Fuel (FUEL).

Shares of FUEL jumped more than 18.3%, or $2.97 per share, to close at $19.20. More than 7.2 million shares traded hands. This compares to a three-month average trading volume of just over 709,000 shares.

The small-cap Redwood City, California-based artificial intelligence technology company surged on news that it lost $0.18 per share against analyst expectations of a $0.30-per-share loss.

Shares of Rocket Fuel have been under pressure since reaching a 52-week high of $71.89 on January 23, 2014. Despite Thursday’s price surge, shares remain more than 73.3% below the January high.

The earnings announcement has left investors wondering if FUEL is ready to ignite to higher levels from here.

Fortunately, a deeper look at the company’s Q3 2014 filing shows some trends that just might portend a significantly higher future stock price from today’s levels.

A Marketer’s Dream

In case you’ve never heard of FUEL, the company is a provider of proprietary software programs that use data and artificial intelligence to adjust online ad campaigns for customers in real time.

The company’s programs adapt and learn from customers’ online behavior, and then customize marketing campaigns to an individual’s preferences in real time – without the customer ever knowing.

Rocket Fuel has greatly benefited from the acquisition of another artificial intelligence company, called [x+1] – a pioneer in programmatic marketing.

The deal closed in September with an enterprise value of $230 million, and the acquisition has already proved accretive to Rocket Fuel’s earnings

Furthermore, the acquisition opens the door for new growth opportunities in the artificial intelligence industry.

Solid Q3 Results

The company reported revenue of $102.1 million, an increase of 63.3% over Q3 2013 revenue of $62.5 million. The sales numbers also beat analyst expectations of $98.6 million.

Rocket Fuel reported non-GAAP revenue ex-TAC of $59.1 million, an increase of 64% over the $36 million for the third quarter of 2013. In addition, ex-TAC revenue grew to 58% of total income for the third quarter of 2014, which is a sign of increasing profitability for the company.

Rocket Fuel’s third-quarter gross profits increased to $47.1 million – a 54% increase over the $30.6 million gross profit from the year earlier period.

As you might expect from a growing company, Rocket Fuel has experienced higher fixed costs in the third quarter due primarily to personnel growth. The company’s headcount grew 87% to 1,028 people, which has, in turn, resulted in a slightly narrower gross margin of 46.2% from 49% a year earlier.

But the lower margins haven’t hampered the company’s outlook.

You see, Fuel has forecast fourth-quarter revenue of $140 million to $165 million, which represents an increase over third-quarter revenue of 37% to 61.6%. This is partly driven by the company’s impressive revenue retention rate of 135% over the trailing 12 months.

And with the company’s 175% year-over-year growth outside the United States, the company should see even higher revenue numbers for 2015.

Rocket Fuel’s stock has been under pressure for several months, but I’m convinced that the time is ripe for the company to blast off to levels not seen since early 2014. Although shares have cooled off over the last couple of trading days, the momentum should build again quickly.

Good investing,

Richard Robinson

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By Richard Robinson