- Digital Media Solutions, Inc. recently went public via SPAC merger, trades by ticker “DMS”
- Industry has strong tailwinds as advertisers still over-index TV and under-index digital
- DMS developed an edge by offering advertisers the ability to pay based on actual customer conversion
- DMS has executed 11 M&A transactions since 2016 and has robust deal pipeline across sectors
- DMS trades at just 2x 2020 sales and 12.7 times 2020 Ebitda, a steep discount to peers
For many advertisers, the true goal of marketing isn’t branding, eyeballs, or even clicks. What they really want is business leads that turn into actual customers, and recently-listed listed Digital Media Solutions, Inc. (NYSE: DMS) has a model that delivers just that.
DMS, which went public in July through a merger with Leo Holdings Corp., a special purpose acquisition company, or SPAC, may have been missed by some investors while many loss-making “story stocks” commanded the market’s attention. DMS has had a choppy start and is trading about 12% below the SPAC’s IPO price of $10 a share.
That creates an opportunity for those who understand the power of DMS’s service offering. The advertising market continues to shift from television to digital, where advertising agencies can tell clients how many clicks their marketing investments generate. Internet ads accounted for just 17% of global spend in 2010 but will reach 56% in 2020 and 65% in 2024, according to Bloomberg data.
But DMS in positioned to outpace the digital ad industry. Its secret weapon: A focus on reliably tracking the link between marketing dollars spent and actual new business generated. That is a completely different approach from the likes WPP PLC or Publicis Groupe S.A., which are known for creating brand awareness but may struggle to show a true ROI to clients in terms of new customers.
DMS Co-Founder & CEO Joe Marinucci Accepting His 2019 EY Entrepreneur of the Year Award
How does DMS do it? For one, it has spent the last eight years focusing on reliable attribution. In most other cases, agencies and advertisers attempt to demonstrate some kind of correlation but the science is inexact at best.
One important tool DMS uses is a set of owned-and-operated websites. Those sites give DMS the ability to track end-customer behavior and in turn charge clients based on performance.
But it would be a mistake to pigeonhole DMS as a marketplace company like SelectQuote or EverQuote, Inc. Such companies tend to focus on a very specific industry like insurance and can really only operate successfully in that sphere.
DMS, in contrast, can reach virtually any industry and take advantage of its data-driven platform, which carefully tracks consumer engagement, user interaction, and various other data on a large scale. That’s all possible because more than $1 billion of ad spend has gone though DMS since 2012, helping it accumulate a database of 150 million consumer profiles.
The results for clients across industries are impressive. In consumer finance, DMS has driven $2.8 billion in consumers loans and mortgages. It has generated leads toward 720,000 insurance policies sold. And DMS has helped education clients enroll 90,000 students.
In the “brand direct” segment, which doesn’t use necessarily use owned websites but harnesses data, the company is equally impressive. The client roster includes a top 10 fast food chain and a top five U.S. nonprofit.
Once again, competitors can attempt to match clients efficiently with consumers, but they often rely on third-party datasets rather than those they created themselves. And the more ad spend DMS handles over time, the greater its advantage over rivals becomes as its data grows in size and detail.
DMS clients appear very happy to pay by the lead rather than by impression. The company boasts a 95% customer retention rate, highly unusual in an industry where clients often switch between agencies frequently. That has helped fuel a 25% annualized revenue growth rate between 2017 and 2019.
DMS Co-Founder & COO Fernando Borghese during the 2019 DMS Summit in Clearwater Beach, FL
There is plenty of room to expand further. DMS says its total addressable market (TAM) is $150 billion annually, a number that will only continue to grow as advertisers leave old media for new, attributable digital channels.
What’s more, DMS has a strong track record of successful M&A transactions, having closed 11 deals since 2016. Looking ahead, the company has a large pipeline of possible deals, including targets that could expand marketplaces in specific industries, enhance ad technology, and boost distribution reach.
Such future deals should further enhance DMS’s advantage over legacy advertising agencies like WWP and Publicis, who have struggled in recent years. Indeed, DMS itself could make a smart acquisition for a company that wants to leapfrog into a digital media leadership position.
DMS is priced cheaply compared to comparable companies, at 2 times 2020 sales and 12.7 times 2020 Ebitda. The Trade Desk, Inc. commands multiples of 29.5 times sales and 123 times Ebitda, according to Sentieo, an AI-enabled research platform. Everquote, Inc. trades at 2.8 times sales and 57 times Ebitda while CarGurus, Inc. trades at 5.2 times sales and 26 times Ebitda.
Digital advertising’s fastest growth may be behind it. But with advertisers demanding more concrete returns on their spend, DMS is a wise bet for investors who do their homework on the industry.
John Jannarone, Editor-in-Chief