Suppose that you’re browsing Twitter Inc.’s (NYSE: TWTR) app and come across a sponsored tweet that mentions a new brand of energy drink. Most people probably wouldn’t click on the link to learn more. However, if the same tweet came from a celebrity chef like Bethenny Frankel with a personal endorsement, there would likely be a higher click-through rate. In many cases, brands mentioned by celebrities through social media like Twitter and Facebook Inc. (NASDAQ: FB) generate more excitement and reaction than traditional advertisements.
IZEA Inc. (OTC: IZEA) aims to capitalize on these characteristics through its network of more than 850,000 registered influencers and 55,000 registered advertisers. Through sponsorships on blogs, tweets, photos and videos, the network enables brand advertisers to realize a higher return on investment than traditional advertising by leveraging the power of celebrities, publications and other influential social media users that create content about their products and services.
First-Mover Positioned to Grow
Sponsored social involves providing compensation to a social media influencer or publisher in exchange for mention, promotion or review through that influencer’s social media channels. For example, Allstate insurance may pay Cee-Lo Green to tweet with a link back to their landing page in his own words rather than incorporate verbiage seen in many promoted tweets – a concept similar to “advertorials” and product placement in traditional media. IZEA has become a first-mover in the niche, giving it first-mover advantage over competitors.
Marketers and influencers already see the benefits of sponsored social media advertising – the problem is connecting them. According to a 2013 IZEA SOSS study, 60% of marketing respondents had dedicated stand alone social media budgets and 60.6% had compensated a social media publisher with cash, trips, or other incentives in exchange for a mention. Meanwhile, 92.2% of influencers surveyed indicated they have or would consider accepting payment for promoting something. Influencers also tend to have an affinity for brands that sponsor them.
IZEA has amassed an impressive array of influencers and brands leveraging its platform as a first-mover in the industry, including influencers like TV host Nick Cannon and multinational companies like Walmart Stores Inc. (NYSE: WMT). The growing user base provides both positive network effects that make it harder for competition and substantial fixed cost leverage due to the modest variable costs involved in its business model. As a result, the company is well positioned to grow substantially along with social media advertising as a whole in the future.
Strong Revenue Growth & Catalysts
IZEA’s revenues increased 47.8% year over year to $1,563,851 during the three months ended September 30, 2013. At the same time, its operating loss narrowed 30% to ($652,439) due to improving economies of scale. These top-line figures could be poised to move sharply higher with BIA/Kelsy projecting that social media advertising will grow at a 20% CAGR to reach $11 billion by 2017 with Twitter’s user base growing at 40% annually.
On the bottom-line, the company’s upcoming launch of IZEA Exchange could help streamline its expenses and move it closer to a near-term break-even point. With a self-service interface, the exchange should significantly reduce support costs and streamline the company’s back office operations while maximizing market efficiency with dynamic pricing. These improvements should boost its operating and net margins as well as support cash generation.
These developments prompted Merriman analysts to issue a Buy rating and a $0.50 per share price target on the stock in January 2014. With revenues expected to reach $9.7 million in 2014 and $14.5 million in 2015, the analyst projected profitability by the end of 2015 with 60% gross margins. Investors may want to take a closer look at the stock given its top- and bottom-line catalysts, analyst support, and long-term potential as social media grows in popularity.
Conclusions
IZEA Inc. represents a compelling investment opportunity within the social media space. While companies like Twitter and Facebook already offer sponsored content, IZEA provides an alternative form of endorsement that could generate a higher return on investment for advertisers. The company’s first-mover status has made it a leader in the sponsored social media space that many experts predict will grow at a 20% clip through 2017.
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