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Opining on Programmatic Ad Buying

Given the hype around programmatic ad buying and in particular Rocket Fuel, I thought it would be timely to discuss the space.

I have been interested in the space quite a while and what got me here was Goldman Sachs initiating coverage on Rocket Fuel at buy with a $69 price target, a 30% increase from where we are now. That sounds like a pretty bullish statement to me.

Debra Schwartz an analyst for GS said:

“We view the acceleration of programmatic buying to be one of the more significant undercurrents shaping the online advertising landscape in 2014…Rocket Fuel, with its “artificial intelligence” technology, is helping to enable this shift.”

She added, “While the competitive landscape is expansive and technology differentiation is a challenge, we expect increased penetration and emerging channels to drive upward estimate revisions.”

While I agree with her rational and that companies involved in programmatic buying are in a rising tide lifts all boats type of scenario, I don’t think the case is as bullish as she makes it out to be. 

First off, this is a very crowded space. Not just for programmatic buyers, but buyers as a whole. You have publishers who do some buying, Facebook and Google with their own platforms, traditional ad networks and then the slew of newer programmatic players like MediaMath, DataXu, Criteo, and Rocket Fuel. This is not just a crowded market, but more like an overcrowded one.

Rocket Fuel sells itself as an artificial intelligence digital ad platform and that is the reasons why it can charge a premium for its service. That’s great, they have an angle, but then again so does everyone else in the space. While they may be ahead in what they are doing right now the gap is quickly growing, and what they don’t provide may hurt them in the long run.
One major thing they do not provide is a self-service platform where large advertisers can do their own ad buying. Many large companies that Rocket Fuel may be going after already have someone internal doing this kind of work and can do it cheaper on their own and gain the transparency that Rocket Fuel does not offer.

Another potential issue that could arise given the amount of players in the space would be ability to purchase media. With everyone purchasing media on the same platforms and inventory not increasing at a similar pace of growth to DSPs, growth could suffer. In the last few months we have already seen that Facebook is not looking to add to the amount of ads users see in their newsfeeds and with Twitter’s last earnings call discussing user grow at 4% over the previous quarter, significantly slower than a year ago, it could be a tough purchasing market.

Rocket Fuel could definitely go up in the short term but with increasing media costs and the competitive market it may be a completely different market a few months from now.

Disclosure: I do not hold stock in any of the companies mentioned above

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