- Due to a great third quarter, PubMatic’s share price has been up by 30% since my very bullish article in September.
- The bullish thesis becomes gradually stronger as the company continues to outperform peers and rapidly shows investors that it is best-in-class.
- Moreover, instead of having a negative impact on PubMatic's business, Google’s policy change might turn out to be a hidden opportunity.
- Compared to its peers, PubMatic still offers the best price-to-value ratio in an already cheaply valued industry.
In September I have written a very bullish article on PubMatic (NASDAQ:PUBM). Despite the 30% increase in the stock price, I remain highly bullish on the company and want to share additional reasons which I did not discuss in the previous article yet.
Below I will not discuss again the basics of what PubMatic's business model is; for that, I suggest first checking the initial article. What I will show below instead, is a short recap of the great third quarter and a longer explanation of why the bullish thesis continues to become even stronger. On top of that, I will review the valuation and show that PUBM is still cheap despite the stock's relative outperformance.
The thesis remains simple: PubMatic is the best-in-class supply-side platform, is operating in a great industry, and is trading at a very cheap valuation.
Earnings were great once again
The third-quarter earnings release certainly was more than satisfactory for shareholders, as the stock price increased by over 30% in days following the release.
PubMatic beat the analysts' estimates on all levels as the company reported massive beats on the EPS, the EBITDA margin, and revenues. Consequently, the company once again raised the guidance for the whole year, announcing an increase of 9% for the revenue, and a 31% increase for the company's EBITDA as compared to the previous guidance.
And the growth is likely to continue as CFO Steve Pantelick expects a 20%-24% revenue growth in 2022:
Overall, the digital ad spend globally is expected to grow about 20-ish percent this year. The current projections it will be about 10% to 12% next year. We expect to grow faster by double that rate in 2022. - Steve Pantelick
The only negative aspect that can be brought up, and is often brought up by bears, is that the number of outstanding shares continued to increase in the last quarter. Compared to the second quarter the number of outstanding shares increased by 640,000 (+1.3%). The increase stems solely from stock options for the management. While I'm not psyched about the dilution I also don't see it as a big problem, as anyways the cost of dilution is already considered in the income statement as a part of the expenses. So, through dilution, PubMatic will save cash which otherwise would be needed to compensate the management, and the company can instead continue to use this cash to finance its growth (working capital) and invest in new innovations. Therefore, the dilution is neither a net-loss nor a net-gain.
The bullish thesis continues to become stronger
On the back of these great earnings, which again clearly showed that the company is best-in-class, I want to discuss two key drivers which I believe will further strengthen the bull thesis and might gradually change the market's view of the company.
Google's policy change: no negative impact on PubMatic
I believe one big reason why the stock price of PUBM and its peers has been under big pressure in the second half of the year was the concern that Google will change the way how its browsers track cookies by moving away from third-party cookies towards using only first-party cookies. I want to explain below what this policy change means and what will be the actual implications for PubMatic's business.
Currently, in order to describe users as accurately as possible, data from different websites is used. For example, a user might first visit Wikipedia to look up some historic article. The user then goes to YouTube to watch some historic documentaries. Then finally when the user reads some news on CNN.com, all the collected information from the previously visited websites is analyzed, and the advertiser then (through algorithms) decides to show the user an advertisement for a documentary-focused streaming service like Discovery+ or CuriosityStream, as the data suggests that this user is likely interested in documentaries. This is how third-party cookies work, and this is how online advertising was done in the past.
Now with Google's planned ban of third-party cookies, online advertising fundamentally changes. In the future, the advertiser can only analyze user data that the first party, the publisher, has collected. Let's keep the same example as above, and dig a little bit deeper: the advertiser does not know that the user has visited Wikipedia and YouTube before. Instead, the advertiser can only use data that is generated directly on CNN.com. CNN has collected information on which articles the user has clicked on in the previous months, how long he reads which articles, and even on which ads the user has clicked. By doing so CNN has gotten a very good understanding of the user (e.g. interests, age range, gender, income range, etc.) and via PUBM can advise the advertisers which advertisements the user might be interested in.
By understanding these two different realities, we can learn two things: First, we can see that the publisher (e.g. CNN = the platform where advertisement is shown) becomes much more powerful as compared to before. This shift from the demand side (advertisers) to the supply side (publisher) certainly is in favor of SSPs (supply-side platforms) such as PubMatic, who represent these publishers. Also due to knowing less about the user (=no third part data, only first part data), marketing will become less efficient and therefore more expensive. Obviously, there is no chance that online marketing will be challenged by other forms of marketing, however, I do believe that the extra costs will lead to more money being spent on marketing, making the already large industry even larger.
CEO Rajeev Goel was asked questions on this topic multiple times during the last earnings call and his best answer was the following:
There is a meaningful shift underway, which is we think a big tailwind for us, which is the applicability and usage of data shifting from the buy side of the ecosystem to the sell side, right? And that's happening because of privacy regulations, third-party cookies, IDFA things like that going away, consumers becoming more aware of how their data is being used. And that ultimately puts the publisher in the driver's seat because the publisher is the one that has the relationship with the consumer. They're able to get consent for targeted advertising from the consumer. They're able to enforce privacy regulations. - Rajeev Goel
So, I don't see any negative consequences arising from Google's planned policy changes, and I believe they could potentially even be good for PUBM. Moreover, two other things should be noted in this regard: First, according to CEO Rajeev Goel, only one-third of the company's revenues will be affected by such policy change, while two-thirds come via completely different channels. And second, Google has recently delayed its planned policy change and might possibly not make as severe changes as investors might have expected in the beginning, as it also takes away the value of Google's data.
Investors can therefore stop worrying about these kinds of policy changes, PubMatic's business model will not suddenly disappear by policy changes. The business model creates real value for advertisers and publishers and it is here to stay.
PubMatic is outcompeting its peers
The third quarter has shown once again that PubMatic is best-in-class by outgrowing all its competitors while simultaneously having the highest profitability (I will show more concrete numbers and a peer comparison further below in the valuation section).
This is yet another indicator that PubMatic's strategy is superior to that of its peers. In my previous article, I have already mentioned two of the main strategic advantages that PubMatic has over its peers: A lower cost base due to having an India-based engineering team and better performance/lower costs due to the in-house IT infrastructure. On top of that, I would like to bring up two other explanations why PUBM is beating its peers.
One big reason is that the engineering/IT team is not only cheaper but also has a much stronger focus on innovation. While many of PUBM's peers have grown through various acquisitions, PUBM has purely grown organically. Now, why is this important? It is important simply because the IT departments of competitors have to spend a lot of time and energy on integrating the IT systems of their acquisition targets. Investors who have experience with these kinds of acquisitions know that IT system integrations can take extremely long and don't leave much time for working on improvements and innovations of the existing system. Meanwhile, PubMatic has only one focus: improving the existing system either by making it more efficient or by offering new innovative functions to clients. Combined with the already lower cost basis due to having the staff in India, it becomes almost impossible for other companies to stay on par with PUBM.
And the second big advantage, especially over smaller players, is PUBM's strategic approach regarding the mediums and areas that the company covers. PUBM publishers have global users (not just limited to one region or country) and have the possibility to show impressions on multiple channels (e.g. phone, laptop, smart TV). This significantly helps to attract global publishers as well as advertisers and I definitely believe that the trend away from local/single-channel platforms towards global Omni channel platforms is bound to continue and will lead to further consolidation, as PUBM continues to take market shares from its competitors.
Reviewing the relative valuation
In my last article, I have compared Pubmatic to its larger peers Trade Desk (TTD) and Magnite (MGNI), and came to the very clear conclusion that Pubmatic is severely undervalued. This time I have also added the two other close peers, Perion (PERI) and Tremor International (TRMR), in order to highlight a few other aspects.
From a pure valuation point of view, the multiples look like this (based on trailing twelve months results):
Source: Author of this article
Without any other information, PUBM seems to be fairly valued, while PERI and especially TRMR, appear to be trading for cents on the dollar. The previously large gap between Magnite's and Pubmatic's valuation almost disappeared due to the recent outperformance of PUBM and the underperformance of MGNI. However, the truth is not that simple. Let's look at it one-by-one in a little bit more detail - I will try to show why I think that even within this already quite cheap industry (besides TTD), PUBM is still the "cheapest" choice.
First, for Trade Desk not much needs to be said as the multiples speak for themselves. Obviously, PUBM is trading at much lower valuation multiples. TTD might have strategic advantages as it is the clear market leader on the demand side, but to me, the gap in the valuation seems unreasonably large.
Second, Magnite. While Magnite has a similar EV/Sales ratio, its operations are not profitable yet and therefore in terms of EV/EBITDA and EV/EBIT, PUBM is valued indefinitely cheaper. Having the same EV/sales ratio, it only makes sense to buy the profitable business, everything else being equal.
For the other two peers, I want to add three additional KPIs that are extremely important, the companies' profitability (EBITDA margin) and their most recent growth rate of the revenues and the profitability (Q3 vs Q2):
Source: Author of this article
Tremor might appear to be by far the cheapest company out of the group, however as we can see, the company has been growing the slowest and also was the only company whose EBIT margin has been decreasing. Therefore the company might look cheap based on past financials, however, the recent trends show that the valuation might be appropriate (at least relative to its peers - the valuation by itself still appears quite low).
Perion looks a bit cheaper based on earnings multiples and much cheaper based on the sales multiple. However, Perion has a similar problem as Magnite as it is only barely profitable, and also its growth rate is lower than that of PUBM. Therefore if we also consider these aspects, I believe that PubMatic's valuation is relatively cheaper than that of Perion.
In conclusion, after comparing PUBM to its peers one by one, I strongly believe that the company offers the best value for the price that it is trading at.
PubMatic has shown over many quarters that due to various strategic advantages, it is able to outcompete its competitors. I, therefore, am confident that it is the true best-in-class supply-side-platform.
Despite great operations and staggering growth rates, the company is still trading at very cheap valuation multiples. I, therefore, remain highly bullish on the stock and believe it is still a good time to buy the company.
This article was written by
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