Sharp-Eyed Stock Market Analysis with a Focus On The Future

RocketFuel May Not Be Ready for Takeoff

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Right now, investors must be thinking of the following phrase with regards to RocketFuel (FUEL). “Houston, we have a problem. “   

RocketFuel is primarily responsible for developing algorithms based on artificial intelligence in order to deliver ideal advertising solutions for branding campaigns.  The firm is looking to take advantage of the fact that an increasing number of firms are looking to improve marketing proficiency through the use of Big Data.

Wall Street analysts are losing patience with RocketFuel.  In spite of its apparent growth that could be seen in its last earnings report, it does not appear to be growing adequately enough to justify its estimated forward P/E Ratio of 60.25.

RocketFuel reported an increase of 74.4 million dollars, which represents a 95% y-o-y increase.  In particular, revenue less media costs increased by 107% y-o-y to $44.7 million dollars.    RocketFuel reported a gross profit of $36.9 million dollars.  This total represents a 110% increase year-over-year.   Additionally, RocketFuel increased its gross profit margin by 3.6% to a total of 49.5%.   RocketFuel expanded its active consumer base to a total of 1251 customers.  This represents a 123% increase from the prior year.

RocketFuel reported a net loss of 11.2 million dollars.  This was a bigger net loss than the 8.1 million dollar total that was reported in the first quarter of 2013.  Yet, this can be mostly attributed to a 98% increase in operating expenditures year-over-year.  There was a 200%  increase in research and development expenditures, 83% increase in sales and marketing and a 100% increase in general and administrative expenses.  Certainly, a major catalyst of the general and administrative expenses increase was an 87% increase in employee headcount year-over-year.   Considering that this is a growth firm, it is not surprising to see that they would still be in the investment phase.

Similar to 3D Systems (DDD), Rocketfuel seems to be sacrificing profitability for the sake of investing aggressively in the areas.

In spite of RocketFuel’s solid earnings report, Wall Street was disappointed by RocketFuel’s projections for the second quarter.   RocketFuel CEO J. Peter Bardwick is anticipating revenue growth in the range 62%-69%.  This would be a major growth rate decline from the prior quarter (95%).  Furthermore, the estimated growth rate would be more than half of the rate reported in the prior year (137%).   This is a significant drop in revenue growth considering that the firm is in the midst of expansion.   The decline in revenue growth is almost indicative of a firm that is in the maturity stage of the company life cycle.  Certainly, RocketFuel does not belong in that stage.

RocketFuel cuts its revenue guidance for the second quarter to a total of $88 million to $92 million dollars.  This paled in comparison to the average Wall Street estimate of $101.8 million dollars. RocketFuel’s shares dropped by 22% after the earnings report.   Additionally, the firm received downgrades from Goldman Sachs (GS) and BMO Capital.

It could be possible that the decline in revenue growth is a result of lost market share.  RocketFuel’s direct competitors include the almighty Google Inc. (GOOG), Facebook, Inc. (FB) and Yahoo! Inc. (YHOO) It is no secret that Google and Facebook have invested heavily into the artificial intelligence space via industry know-how and acquisitions.    If these industry stalwarts decide to concentrate its full efforts on the artificial intelligence space, there is no doubt that they can take the industry under siege at the expense of RocketFuel.    It is not implausible for Rocketfuel to be considered as an acquisition candidate by its competitors.

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As you can see above, RocketFuel’s stock performance has paled in comparison to its competitors. RocketFuel’s stock has declined by 64.44% YTD.   Three words could be used to describe RocketFuel. FAILURE TO LAUNCH.

Andre Waldron

Andre Waldron is the founder of Market Eyewitness. He provides financial analysis and commentary on equities, economic indicators, industries and mutual funds. In addition, Andre Waldron is also a contributor to Seeking Alpha as well as The Street.

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