Vertical Scope Holdings: Innovate Rollup Strategy

Thesis

VerticalScope Holdings Inc. (FORA:CA) offers a unique opportunity within the digital media market through their focus on niche online communities. The company's engagement model, which combines community, content, and commerce, makes it unique from platforms, since they offer targeted advertising solutions with a potential high ROI for advertisers​.

The recent financial results demonstrate a strong upward trajectory, with Q3 2024 revenues reflecting a 15% year-over-year increase to $17.8 million​. In addition, the company has shown an ability to generate strong operating profits with EPS of $0.06/share​. With a focus on digital advertising—which constitutes about 85% of total revenue—VerticalScope will likely benefit from the growing demand for targeted ads within niche markets​.

Despite facing a very competitive advertising market, the company’s strategic acquisitions and commitment to maintaining unique community identities allow them to thrive in this environment​. Their emphasis on leveraging advanced data analytics for ad optimization enhances their competitive edge for tailored advertising solutions that engage specific audience segments​.

Background On Company 

Founded in 1999 with their headquarters in Canada, VerticalScope is a technology company that operates a cloud-based digital platform for online enthusiast communities in high-consumer spending categories. They enable individuals with common interests to connect, explore their passions, and share knowledge about the things they are interested with. Through targeted acquisitions and development, the company states they have built a portfolio comprising over 1,200 online communities and more than 100 million monthly active users (MAUs), with 55 million registered community members.

VerticalScope's platform intersects community, content, and commerce, focusing on hyper-specific subjects that foster strong affinities among online communities. Their members are made up of enthusiasts, fans, experts, pros, hobbyists, and armchair analysts, according to the company.

Revenue generation for VerticalScope comes from digital advertising and e-commerce transactions. The content within their communities provides context on specific products that come with purchase decisions. Advertisers benefit from reaching a scaled audience of in-market consumers, while VerticalScope earns revenue from e-commerce transactions influenced by its communities. The company has established direct relationships with e-commerce merchants and brands, sharing revenue each time users purchase based on their community interactions​.

The Fora platform, launched in 2019, is a cloud-based system that combines proprietary software with leading open-source technologies. This allows the company to operate, develop, and scale their extensive network of communities efficiently. The benefits include a consistent user experience, centralized community management, integrated monetization, and improved scalability and reliability. Since its launch, the Fora platform has positively impacted VerticalScope's business, accelerating user growth, engagement, and monetization​. I’m excited about this in-house platform offering unique scaling technology. This is their secret sauce for managing 1,200 different websites. 

In 2021, the company went public on the Toronto Stock Exchange at $22 a share. 

What Makes Their Rollup Strategy Special 

The company employs a distinctive rollup strategy, particularly within various niche online communities with an approach focused on acquiring niche community websites, to boost their market presence while ensuring low incremental costs for acquisition​s.

What makes their rollup strategy special is VerticalScope's commitment to maintaining the unique identity of each acquired community. By allowing these communities to retain separate brands, they offer a sense of ownership and belonging among users, which fosters deeper engagement​. This contrasts with the strategies of larger, more generalized platforms, so VerticalScope can develop more highly engaged user bases. This translates into lucrative opportunities for targeted advertising, as advertisers are keen to reach specific audiences​ as their target market.

With their strategy capitalizing on the growing trend of digital advertising in niche segments, VerticalScope offers a unique strategy. The company leverages advanced data analytics through their proprietary Fora platform to optimize content delivery and enhance monetization strategies. This analytics-driven approach offers the company user behavior analytics to be used in tailoring advertising solutions that yield higher returns for advertisers​. Their rollup strategy therefore involves acquiring more communities and then integrating these acquisitions into a cohesive ecosystem that benefits both users and advertisers.

Risks

Google and Facebook (Meta) still dominate the targeted advertising market due to their extensive data collection capabilities and advanced algorithms. These platforms offer advertising solutions that allow advertisers to reach specific demographics, interests, and behaviors at scale. There’s a risk that smaller players like VerticalScope may struggle to compete for advertising dollars against these well-established giants.

Adding to this, programmatic advertising has already changed how digital ad buying occurs. Automated ad buying processes allow advertisers to purchase ads across various platforms in real-time, which raise competition for ad placements. This will likely drive VerticalScope to adopt advanced technology and data analytics strategies to stay relevant and competitive.

When asked if direct advertising can catch up to programmatic in terms of growth, President and COO Christopher Goodridge announced during the Q2 2024 earnings call: 

“It's unlikely direct will match programmatic's growth rate. Direct deals have longer cycles, but audience growth makes us more attractive to direct advertisers, supporting long-term growth.”

This comment is key. They’re not looking to compete head to head. They are being dynamic which we find fascinating. 

Expectations in Q2 were also higher than what was realized. President Goodridge explained:

“CPMs were solid but not as strong as expected. Some direct deals had revenue recognition pushed into Q3. Direct advertising has become more challenging to predict, while programmatic remains more predictable due to ad tech investments.”

Bottom Line

VerticalScope operates a cloud-based digital platform for online enthusiast communities with a focus on high-consumer spending categories. The company capitalizes on digital advertising and e-commerce transactions to generate revenue. Their Fora platform enhances user engagement and monetization, while their distinct rollup strategy fosters community identity and loyalty among users​.

Despite the highly competitive targeted advertising market, I remain optimistic about VerticalScope's future. Their Q3 operating data tells me the company is well positioned for growth​. 

Disclosure: At the time of this publication no members affiliated with Marksman Research own stock, options or other interest in FORA:CA.