Rocket Fuel Drops 22% After Q1 Earnings - Analyst Blog

Shares of Rocket Fuel Inc. FUEL, an artificial intelligence and big data service provider, slumped nearly 22% after the company reported disappointing first quarter results, coupled with a distinctly dismal outlook. The company has shown a consistent downtrend since the beginning of the year, recording a year-to-date return of -63.3% thus reflecting sluggish growth. Rocket Fuel's gloomy guidance reinforces investors' anxieties about the firm's prospects.

 

On May 8, the company reported its first-quarter 2014 earnings, recording a 95% year-over-year revenue growth to $74.4 million, driven by a healthy upsurge in the number of active customers and improvement in mobile delivery sales. The company missed the Zacks Consensus Estimate of $76 million.

 

However, net loss for the company came in at $11.2 million, wider than the loss of $8.1 million reported in the prior-year quarter. On a per share basis, net loss stood at 33 cents compared with 97 cents in the prior-year period, narrower than the Zacks Consensus Estimate of a loss of 44 cents per share. The considerable improvement in loss per share was attributable to a secondary public issue, which resulted in the number of shares increasing from 8,298 in the year-ago quarter to 34,033 shares in the reported quarter.

 

The losses were a result of aggressive investments in research and development, sales and marketing mirroring the company's consistent endeavour to keep innovating in order to retain its technical edge.

 

The primary drag was the bleak outlook for the upcoming quarter as the company slashed revenue guidance to a range of $88–$92 million, whereas street expectations pegged the figure north of $100 million. The figures reflect year-over-year expected revenue growth of 65%, compared with a 95% hike in the reported quarter and a 137% hike in the prior year quarter, as tough competition snatches market share away from the advertising technology company.

 

Following the disappointing earnings, investment banker The Goldman Sachs Group, Inc. GS downgraded the firm to "neutral" from "buy” and curtailed its price target to $25 from $69, citing a reduction in average customer spending. Close on the heels of that, BMO Capital, the investment banking arm of Bank of Montreal BMO, adjusted the company's rating to "market perform" from "outperform."

 

Rocket Fuel develops artificial intelligence algorithms to deliver optimized advertisements to support branding campaigns. With an increasing number of companies seeking to leverage big data technology for improving marketing efficiency, Rocket Fuel, theoretically, looks set to exploit the growing market. 

 

However, in the dynamic field of technology, the competitive landscape is prone to quick changes. For instance, if technology stalwarts like Google Inc. GOOG and Facebook, Inc. FB decide to capitalize the online artificial intelligence data analytic space, it would likely take chunks of market share away from Rocket Fuel and hinder its growth prospects.

 

Boasting a strong balance sheet, Rocket Fuel expects growth to pick up in the latter half of the year once its expanded product offerings and recent sales hiring starts to pay off. But whether the growth will be adequate to justify the company's huge investments in sales talent and R&D remains to be seen.

 

Rocket Fuel presently sports a Zacks Rank #3 (Hold).