Buy Digital Media Solutions For Small Cap Growth

Digital Media Solutions Falls Back On Q1 Results, Outlook 

Digital Media Solutions (NYSE: DMS) is a great play for small-cap growth investors. The company operates as a performance marketing company with clients across industries and verticals and its growing at double-digits in its first year post-IPO. Its business is being spurred by the accelerated shift to digital, a shift that can be seen in eCommerce data across the globe. And Digital Media Solutions is not only growing at a strong organic rate but is also building out its empire through acquisitions and on track for sustained growth over the next few years.

“Our digital performance advertising solutions resulted in strong performance once again during the first quarter of this year, and we feel confident in our business for the rest of the year,” noted Joe Marinucci, Co-Founder and Chief Executive Officer at DMS. 

The problem with share prices today is that the Q1 results were largely expected. Sure, the company beat the consensus for revenue by a fair margin but not by any more than the company had already indicated. You see, Digital Media Solutions gave us a taste of what to expect just a week before the report was released so, as good as they are, the Q1 results weren’t the catalyst they could have been. What this means for us is a chance for entry into this stock and one at a deeply discounted rate. 

Digital Media Solutions Has Mixed Quarter 

Digital Media Solutions had a good quarter in terms of its performance but mixed in that earnings fell short of consensus despite the revenue strength. The company reported $99.5 million in consolidated revenue or up 33.5% and 315 basis points above the consensus which is good, great even. The beat is noteworthy but tempered by the company’s pre-announcement for revenue in the range of $97 to $100 million so not really a beat at all, it's just in line with guidance. The takeaways, however, are that the business is growing at a solid double-digit rate and growth is robust across all segments. The Brand-Direct Solutions segment grew nearly 38%, Market Solutions grew 44%, and Other grew 60% proving the company’s services are in demand. 

“For our largest vertical, insurance, we generated organic year-over-year revenue growth of 102% and quote request growth of 111%, and we anticipate continued strength within insurance throughout the year,”  continued Mr. Marinucci. 

Moving down the report, the company experienced margin improvement and earnings growth but short of the consensus which is a small problem. The impact of winter weather is faulted for the miss, however, with the expectations the lost revenue will be recouped in the 2nd quarter. The miss in GAAP earnings is also due to increased acquisitional activity that will boost revenue in the coming quarters so not as important to us as the top-line results. Regardless, the gross margin grew 140 basis points to 28.5% to help drive a 5.4% increase in adjusted EBITDA. Adjusted earnings per share came in at $0.09 but $0.03 shy of expectations while the GAAP loss of ($0.01) missed by a dime. 

The Technical Outlook: Digital Media Solutions Moves Back To Support 

Shares of Digital Media Solutions moved back to a strong support level on the Q1 results and are already showing signs of buyers. The move has the stock trading just above the IPO price and a level that has acted as support or resistance many times over the past year. With the company performing so well and the guidance for 2021 positive, we view this as a buying opportunity and it looks like the market agrees with us. The early action has prices moving up from the opening low in the confirmation of support but there is still a risk. The move is so far fairly weak and the indicators are not responding. If support at this level can hold up we expect to see a buy signal form but we urge caution until then. If support isn’t able to hold this stock may be snatched up a cheaper price, possibly as low as $7.