What’s Hurting The Rubicon Project Inc (RUBI)

It’s a hard pill to swallow for shareholders of California-headquartered company The Rubicon Project Inc (NYSE:RUBI) as its shares dropped more than 15% in after-hours trading this Tuesday on weak guidance for the ongoing quarter. However, on a positive note, RUBI reported better than expected results for the fourth quarter — actual EPS and revenue of $0.37 and $66.87 million versus the expected $0.17 and $63.6 million, but well below its year-ago-quarter’s results of $0.72 and $83.7 million.

“We executed well against our revised outlook for the fourth quarter, posted solid 2016 financial results, and made significant progress with products and customers during the year, despite the many challenges we faced”, said company founder and chairman Frank Addante.

“As we move into 2017, we remain focused on signing up more publishers, application developers, and adding inventory to our global exchange, a key component to drive future growth”, he added.

NYSE:RUBI Rubicon Project Future Revenue and Net Income by Simply Wall St
RUBI Revenue Forecast Up to 2020

Founded in 2007, Rubicon provides a marketplace to buy and sell advertising. The company saw steep growth over the past five years — revenue rose from $57.1 million during FY’12 to $278.2 million for FY’16 (ended December). Over the past year, though, revenue grew only 12% and is now expected to drop over the next few years before tracking an upward trajectory, based on sell-side analysts’ consensus estimates. The slowing down revenue growth has hurt the company with its market capitalization cut by nearly 60% in less than a year.

The trouble

NYSE:RUBI Rubicon Project Intrinsic value by Simply Wall St
RUBI Intrinsic Value Estimate

What spooked investors yesterday, though, was its guidance for the first quarter of ongoing FY’17. The company guided a revenue of $41–$44 million and loss of $0.26–$0.22 compared to analysts’ revenue and EPS projections at $52.1 million and a loss of $0.07. During the rapid growth phase, investors had put a hefty price-tag on the company, which,  with one of the largest mobile ad exchanges, is competing with the likes of Facebook and Google.

Now concerns about growth have resulted in them fleeing, while value investors still find the space highly competitive and RUBI’s valuation still more than what can offer them a significant margin of safety. The company’s balance sheet is strong, but dilution in equity also kept investors at bay, amid a challenging operating environment, as Mr Frank highlighted. RUBI operates in a fast growing market, but it needs to prove that it can capture a considerable market share, like its bigger counterparts, to draw investors’ interest.