Rubicon Project Is An Undervalued Ad-Tech Opportunity

| About: The Rubicon (RUBI)

Summary

Adoption of header bidding should improve publisher yields on ad inventory and should benefit RUBI and other SSPs.

RUBI is generating substantial cash flow from operations relative to both its enterprise value and market capitalization.

With ~$211M in net tangible assets relative to a fully diluted market cap of ~$408M, RUBI has a healthy balance sheet.

While analysts are correct to fault RUBI for being slow to adopt header bidding, the new technology should provide a net revenue lift over time.

Rubicon Project (NYSE:RUBI) is a supply-side-platform that works with web and mobile publishers to maximize the value of their advertising inventory. By aggregating supply (publishers) and facilitating real-time auctions of their remnant ad impressions among demand sources (advertisers), RUBI, and its competitors, play an important role in the Internet advertising value chain.

While RUBI remains a strong player in the space, the market is severely discounting its value in response to its slowness to adopt a disruptive innovation in the SSP space: header bidding. However, they now have a header bidding offering that should increase their publishers' revenue. Since SSP fees are often calculated as a percentage of publishers' advertising revenue, this should also improve RUBI's top line over time.

RUBI's financials are solid. Though it has been reporting net losses from operations on an accrual basis, it has generated material cash flow from operations in each of the last four quarters (despite the seasonality that afflicts the advertising industry). In the nine months ending on September 30, 2016, the company generated roughly $29M in free cash flow-even though the last quarter of the calendar year is the strongest season for online advertising.

RUBI's ~49M shares outstanding and 6.2M outstanding options (as of October 24, 2016) yield a fully diluted market capitalization of only $408M (given Friday 12/2's closing price of $7.39). Furthermore, many of the outstanding options are presently underwater. Meanwhile, the company has ~$211M of net tangible assets at the end of the most recent quarter, with over $300M in cash and receivables relative to total liabilities of just $192M. RUBI has a very healthy balance sheet.

RUBI's recent price action is the result of analyst downgrades related to the company's admission that it was slow to adopt header bidding. However, now that they have adopted the new technology, their financial performance should be improved, not degraded. Any short-term decline in advertising impression market share is likely to be offset by an improvement in yield per impression.

RUBI has a healthy balance sheet, consistently generates cash and is ironically valued at a discount, following analysts' comments that it was slow to adopt a disruptive technology that is now poised to improve its overall financial performance.

Disclosure: I am/we are long RUBI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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