Rocket Fuel IPO Soars on First Day of Trading

Shares of Automated Ad Buyer Immediately More Than Double in Debut

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Ad tech companies have been met with a cold reception by Wall Street this year, but automated ad buying company Rocket Fuel was greeted warmly in its market debut Friday.

Rocket Fuel increased the offer price of its IPO to $29 per share, up from an initial range of $24-$27. The stock immediately jumped to $59.95 per share when trading opened Friday morning and held around $57 as of midday. By comparison, video ad networks YuMe and Tremor Video saw their stocks hover at their initial offering price or dip below it when they debuted.

Co-founder and CEO George John said in an interview that he was "just happy that investors could appreciate us" because public investors can be generalists who have a hard time differentiating between ad tech companies, particularly given how new the sector is to Wall Street. He added that investors focused on the company's revenue growth. "A lot of investors saw that and said, 'Shoot, even if we don't understand what's happening here, that's good,'" Mr. John said.

Rocket Fuel CEO George John
Rocket Fuel CEO George John

Through the sale of 4 million shares, Rocket Fuel raised $116 million, but Friday's immediate stock jump suggests the company left a lot of money on the table -- perhaps as much as $123 million. But its success could bode well for other ad-tech firms planning to go public.

Mr. John said Rocket Fuel would use proceeds from the IPO to invest in its core technology. Richard Frankel, who also co-founded the company and serves as president, said it plans to hire more salespeople and open more offices.

Rocket Fuel's revenue hit $106.6 million in 2012, up 139% from 2011. Through the first six months of this year, the company raked in $92.6 million, an increase of 134% from the same period a year earlier. However -- as was the case with Tremor Video, YuMe and online ad software company Marin Software, which went public in March -- Rocket Fuel was not profitable at the time of its IPO. The company has actually gone deeper into the red this year, recording an $11.9 million loss through the first six months of 2013, compared to a loss of $10.3 million for all of 2012.

Public market investors are usually wary of putting money into unprofitable companies, which is part of the reason Tremor Video and YuMe have had a rough time as public companies until recently. But Rocket Fuel likely benefitted from how different it is from those companies. Both Tremor Video and YuMe are video ad networks with sizeable sales teams that create overhead pressure. Rocket Fuel pitches itself as an artificial intelligence company. Instead of sales teams, it has computers that automatically bid on ad slots, meaning Rocket Fuel's growth hinges on its ability to fine-tune its technology and not on growing its staff.

Long-term risks
However, Rocket Fuel may face significant risks. Marketers are increasingly applying their own data to programmatic buys, seeking an upper hand against competition buying on the same platforms. That means Rocket Fuel's technology may not be as important to buyers in a few years.

"We see risks around much of what the company does," said Pivotal Research analyst Brian Wieser in a research note in advance of Friday's IPO. "Our guess is that any performance-based advantages that a Rocket Fuel might be able to highlight will be relatively short-lived, as best practices are increasingly commoditized as the sector evolves."

Further, Rocket Fuel may be in trouble if Google goes forward with a plan to replace third-party cookies that it's said to be considering. Google wields great power in this area, as its Chrome browser commands over 40% of the browser market. Rocket Fuel, like many ad tech companies, depends on third party cookies for its targeting and campaign enhancement features to work properly.

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