I quite like investing in ‘ugly ducklings’ and XLMedia (LON:XLM) has some features that will put investors off – it is Israeli, an online marketing business (characterised as click-bait websites) and mostly catering to the Gambling and  Gaming sectors.  Which is probably why, with a six-year 45% CAGR it’s on a very attractive p/e of 12 and pays a 4.5% dividend yield.

 However, behind the grubby façade is a very savvy data and analytics driven marketing outfit with some very hard to replicate IP and digital assets. Far from being the type of click-bate pop-up marketer, that most people despise, circa 50% of revenue is generated through high quality websites to recruit customers, and c. 50% (different base) of revenue is based on 'performance' - a revenue share of the paying customers' turnover with their client. So much higher quality earnings than 'click-through' revenue as it's payment by results – recruiting a paying customer.


… with proprietary highly sophisticated big data marketing analytics   

Take a look at the full year webcast at http://www.xlmedia.com/investor-relations/ as it provides a good insight into the operating model and dispels some of the misconceptions about the way this business operates.  To illustrate, rather than being a click-bate marketer it actually buys these services from others (e.g FaceBook), investing their own money, to recruit customers that it then sells on to one of its clients.  To do this it simultaneously runs thousands of self-funded campaigns in different ways, in different verticals, analyses what works – calculates the Return on Investment and then repeats and refines the successful campaigns.   This is sophisticated big-data analytics in action which in practice is very difficult to execute successfully.  

 A further clue that this business has a defendable niche (a.k.a  an economic moat) is shown by the 29% Return on Capital and 29% Operating Margin; and reflected a StockRank score of 96 (Quality 99 Value 56 Momentum 88) and designation as a Speculative, Small Cap, Super Stock. 


So XLMedia appears to have the DNA but can it transform into a ‘beautiful swan’? 

Well, they are certainly proving to be very successful in the highly competitive gambling sector. They have developed tried and tested tools and techniques that are very likely to be transferable to other sectors such as financial services…

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