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Rocket Fuel (FUEL) – An Artificial Intelligence Stock?

In previous articles, we’ve talked about the merits of artificial intelligence and big data and how these technologies can enable a multitude of industries to begin learning how to do things more effectively. One area where these technologies can be used is in digital marketing. Also referred to as “programmatic marketing”, AI and big data can be used to figure out what digital ad to serve you up at any given time to increase the likelihood that you’ll click on it. While we’ve said before that you can’t invest in artificial intelligence yet as a retail investor, we did come across one publicly traded company called Rocket Fuel (NASDAQ:FUEL) which is playing in the “programmatic marketing” space and while their value proposition sounds exciting, there’s much more to this company than meets the eye.

Rocket_Fuel_Logo

 

 

Founded in 2008, Rocket Fuel uses artificial intelligence and big data to determine which ad is best to serve at any given moment in order to increase the likelihood of you clicking on that ad, and then engaging with the advertiser. In the words of the company:

Core to our ability to connect advertisers and consumers is our artificial intelligence, or “AI,” engine, which consists of big data-driven predictive modeling and automated decision-making components. Our Programmatic Marketing Platform uses a technology enabled by our AI that we call Moment Scoring™, which is designed to consider in a fraction of a second whether a particular advertising opportunity, or impression, is the right time to influence a consumer, based on our platform’s real-time scoring – positive or negative – of the likelihood of consumer engagement with the advertising based on relevant attributes.
Got it? If that’s too convoluted of an explanation, here’s a visual aid:
Rocket_Fuel_Applied
We can see that Rocket Fuel knows a fair number of attributes about Annie such as where she is, what she did earlier, and what she might be likely to buy at that very moment she is looking at her phone. The AI engine uses all that big data they’ve accumulated (not just from Annie but from people who match her same profile) to figure out that right then and there, that at that moment she will be most likely to buy a concert ticket. Consequently, advertisers who are trying to sell concert tickets will pay more for that ad slot. Good idea right? Indeed it is. Revenues for Rocket Fuel soared over the years, as did costs:
Rocket_Fuel_Revenues

While the story so far sounds compelling, the actual share price performance has been anything but. Rocket Fuel began trading under the ticker FUEL in September of 2013. Since then, their share price has lost -94.5% of its value:

Rocket_Fuel_Price

If you would have bought $10,000 worth of FUEL shares on the first day the IPO began trading, your holding would be worth just $550. We never thought we’d say this, but you probably would have been better off investing in OTC stocks. FUEL shares have lost over -64% just in the past year alone. If you’re a Rocket Fuel investor, you have to be shaking your head right now and thinking, WTF happened?

Here at Nanalyze, we use ads served up by Google AdSense which generate revenues for us. If you click one of our ads, we’ll make some change. While we serve up hundreds of thousands of these ads, only a certain fraction are actually clicked based on how interesting our readers find the ads that are presented. If we were to actually go and start clicking these ads ourselves, Google would know and not credit us with the commissions. Consequently, if we created a “bot” that would click these ads from anywhere in the world, Google would be able to detect that and not pay us for those clicks. Why is this important? Because if you’re say Mercedes Benz, and you’re paying Google 25 cents every time one of your adds is clicked, you want to make sure real people are clicking those ads otherwise where’s the ROI?

Unfortunately for Rocket Fuel, some bad news came out in May 2014 which is depicted by a red dot on the above share price chart. Telemetry, a UK company that specializes in detecting ad fraud, discovered that over a 3-week period, 57% of Mercedes Benz ads served up by Rocket Fuel were clicked on by “bots”. Ouch. Rocket Fuel was quick to release a free tool shortly afterwards for fraud detection and wasn’t shy about addressing this issue in articles like one titled “Lessons learned: Ad fraud is a big issue that doesn’t need to be a big problem“. The underlying message seems to be, “we’ve learned our lesson so stop punishing our share price“.

When looking at FUEL’s most recent 10-K, there is a great deal of turmoil going on inside this Company. The co-founder and former CEO and Chairman of the Board, the CFO, and Vice President of Engineering all left the company in the fourth quarter of 2015.  Since April 1, 2015, FUEL no longer has access to Facebook’s FBX platform, though Facebook allows other companies in their industry to purchase inventory through the FBX platform. Revenues are starting to decline now instead of grow, and they’ve failed at meeting guidance given to shareholders. A class action lawsuit has been filed alleging that “the defendants made false and misleading statements about the ability of our technology to detect and eliminate fraudulent web traffic, and about our future prospects“. While FUEL once had a market cap that exceeded $2 billion, they’re now valued at just $135 million.

So why doesn’t someone step in and acquire FUEL? Nobody wants the unknowns associated with the pending litigation. A competitor like Google could snap them up for next to nothing but might just be thinking that Rocket Fuel (NASDAQ:FUEL) is digging their own grave and sees them as no longer a competitive threat. So is Rocket Fuel (NASDAQ:FUEL) an AI stock? Yes. Is it an AI stock you should invest in at the moment? It seems like the answer is no until we see what happens with the pending lawsuit.

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