The Tremor International (LSE:TRMR) share price has moved a bit like a roller-coaster recently. In June, the stock dropped by 15% in a single day. It almost made a complete recovery until last week where it dropped another 10% in a single trading day. Despite this volatility, the 12-month performance of the business still sits at a massive 430% return. But the question remains, what’s causing this seemingly erratic behaviour in the Tremor share price? And is this an opportunity to buy some shares for my portfolio at a discount?
The volatile share price
Despite appearances, the sudden drops in Tremor’s share price do not appear to be caused by any immediate problems with the business. But rather from the firm’s US IPO. To raise additional capital, it listed itself on the US stock exchange in June in addition to its UK listing. The process helped raise $128.6m. However, it also created a dilution effect that seems to be responsible for the volatility that month.
Jump ahead to last week, and the same thing happened. The underwriters of the US IPO have decided to execute their overallotment option. This is a special arrangement that allows underwriters to issue additional shares to those initially planned. And it only tends to happen if an IPO proves to be exceptionally popular among investors. This secondary offering has allowed Tremor to raise a further $19.3m, but its share price once again suffered another dilution effect.
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What does the business do?
Seeing a sudden drop in a stock is never a pleasant sight when already invested in a business. But these often present some of the best times to buy shares for a lower price. So what does Tremor actually do?
The firm is a provider of digital advertising technologies, specialising in data-driven video commercials. Its customers pay to access its various platforms that help design and place effective advertisements. But the real value stems from the analytics suite. Using these tools, companies can tailor their adverts to target specific audiences, resulting in significantly higher click and conversion rates.
It’s certainly not the only company in the space. However, it’s proven to be a powerful tool that over 5,000 businesses are relying on. That certainly sounds like a promising opportunity to me. But like all data-driven firms, Tremor has some regulatory hurdles on the horizon.
It’s no secret that online privacy is becoming a prominent issue in society. And as a result, new regulations are being introduced that limit the type and amount of data that can be collected. Naturally, that creates limitations for Tremor, whose services are highly dependent on data collection practices. Suppose new legislation prevents it from delivering its services, or even worse, it fails to comply with them? In that case, the Tremor share price could quickly plummet as customers flock to rival platforms.
Time to buy?
As promising as this business sounds, I’m personally not interested. Even with the recent drop in its share price, the valuation remains exceptionally high, with a price-to-earnings ratio of over 2,760! To me, this looks like the stock is mainly being driven by speculation rather than underlying fundamentals. Therefore, I’m keeping Tremor on my watchlist for now.
