How Facebook, Alphabet Could Hurt YuMe

Amid intensifying competitive pressures, Barclays said it would be difficult for YuMe Inc (NYSE: YUME) to achieve its long-term EBITDA margin target of 20 percent plus, thereby providing little room for upside.

The bearish thesis comes despite management guiding to an improvement in year-over-year profitability in 2016, and showing some progress in the first quarter.

YuMe, a provider of multi-screen video advertising technology, faces unabated competition from established players such as Facebook Inc (NASDAQ: FB) and Google, which now reports under Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL).

"We estimate revenue will grow 4 percent this year and next — not fast enough, in our view, to drive scale efficiencies," analyst Christopher Merwin wrote in a note.

Merwin said by 2017 he expects Google and Facebook will have 55 percent combined share of the total display market, up from 36 percent in 2014. In online video, where YuMe is focused, the analyst expects similar shares dynamics to unfold.

"For video in particular, marketers are very focused on ROI given the high cost of video ads, and platforms that are able to better target users through log ins (rather than cookies) should be able to provide higher ROIs to marketers, in our view," Merwin highlighted.

Further, the ongoing consolidation of the ad tech sector will mostly to the benefit large players like Facebook and Google who have unmatched data and scale.

The analyst expects most of the consolidation from here will be organic, as the bigger players now have all the required technology to offer end-to-end advertising solutions to marketers and publishers.

"If M&A does indeed slow down for this sector, we believe that could weigh on multiples for standalone players. While YuMe has been executing much better in recent quarters and operates in a compelling end market, we believe competitive pressures are unlikely to abate in the nearer-term," Merwin elaborated.

Merwin, who downgraded the stock to Underweight from Equal Weight, expects the company to earn $0.08 this year and $0.20 in 2017. The analyst also cut the price target on the stock to $3.50 from $4.

At time of writing, shares of YuMe were down 2.99 percent on the day at $3.57. The stock has dropped 30.5 percent over the past 12 months.