This month we are examining a small-cap company that piqued our interest. We aim to assess whether it meets our quality criteria and if its valuation is appealing.
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1. Key Facts
Description: PubMatic Inc (“PubMatic”, “Company”), with ticker symbol $PUBM, is a sell-side advertising platform which enables real-time programmatic advertising transactions for publishers and advertisers. Through its sell side platform, PubMatic aims to help digital publishers and app developers to monetize their content through ads.
Key Financials: Over the period FY18 to trailing twelve months (“TTM”) Q1 FY24, the Company depicted a revenue Compound Annual Growth Rate (“CAGR”) of 21.7% and operating income CAGR of 7.2%, reaching a TTM revenue of c. $278 million and operating income of $7.2 million (margin of 2.6%). PubMatic has cash and short term investments of $174.1 million compared to nil debt and lease liabilities of $24.4 million.
Price & Market Cap (as of 22nd May 2024): Its market cap is $1.15 billion with a 52-week low of $10.9 and a 52-week high of $25.4, whereas it currently trades at $23.1.
Valuation: Pubmatic trades at a TTM EV/EBITDA of 19.4x (3 Year average of 13.6x) and a TTM EV/Sales of 3.8x (3 Year average of 3.8x).
2. Business Overview
Founded in 2006 and making its initial public offering in 2020, PubMatic was established with the vision that programmatic advertising would be the future of digital ads. As a Sell-Side Platform (“SSP”), the Company is dedicated to helping publishers (website owners, mobile app developers, and connected TV (“CTV”) providers) monetize their content through programmatic advertising. PubMatic’s technology platform enables publishers to manage and monetize their ad inventory by connecting them with advertisers and demand-side platforms (“DSPs”). Publishers provide access to their ad inventory to PubMatic, while advertisers and DSPs use PubMatic’s platform to purchase this inventory through real-time bidding (“RTB”) facilitated by PubMatic’s auction technology. In return, PubMatic earns fees from publishers based on the monetized ad impressions.
Traditionally publishers negotiated directly with advertisers to set prices for ad space on their digital properties. Programmatic advertising has automated this process. In fact, programmatic advertising refers to the automated buying and selling of digital ad space in real-time using technology and algorithms. This approach leverages data and targeting capabilities to deliver personalized and relevant ads to specific audiences, allowing advertisers to reach their target audience more efficiently and achieve better Return on Investment (“ROI”) by eliminating manual processes and utilizing data-driven insights. Programmatic ads today account for over 90% of US digital display advertising, while programmatic is now moving to mobile and CTV.
The importance of programmatic advertising has grown alongside the rapid increase in digital content consumption. Consumers are spending more time online, driven by the shift from desktop to mobile and the rising adoption of CTV. Over the past decade, the share of total US programmatic digital display ad spending on desktop decreased from 60.7% to 12.9%, while mobile's share increased from 39.3% to 70.6%, and CTV's share rose from zero to 16.5%, reflecting the change in the means of content consumption.
Source: eMarketer
a. The supply chain
The digital ads space features a complex supply chain with several intermediaries taking fees from the buying and selling of ads between advertisers and publishers. Here’s how ad dollars flow through the supply chain:
When someone visits a website, the site communicates with several SSPs that aggregate ad inventory from different publishers.
These SSPs send a bid request along with information about the available ad space to DSPs, which advertising agencies or brands use to purchase ad space.
DSPs place bids to win the opportunity to display their customers’ ad on the user's device via the SSP.
The highest bidder wins the auction and advertiser pays a fee (subject to agreed pricing model) to the DSP for the impressions.
The DSP remits payment to the SSP, which in turn pays the publisher after taking a fee from the publisher.
Therefore, on the sell side, publishers and SSPs collaborate to manage and distribute inventory, while on the buy side, advertisers and DSPs create and deliver ads.
Source: Investor Presentation 2023
b. Revenue channels
PubMatic offers omnichannel capabilities addressing various ad formats, including omnichannel video and display, which are delivered across different device types such as Mobile, CTV, and Desktop.
Omnichannel video is the fastest growing channel of the Company, increasing its share of revenue from approximately 25% in Q1’22 to approximately 35% in Q1’24. In contrast, display ads account for approximately two-thirds of revenues but grow at a relatively lower rate.
Source: StockOpine Analysis, PubMatic earnings calls
Within omnichannel video, CTV has been the outperformer, benefiting from the shift in ad spend from linear TV to CTV as consumer preferences evolve. While PubMatic did not provide specific growth rates for CTV revenues in the last two quarters, revenues from CTV had been growing at triple-digit rates during FY22. However, growth decelerated to 50% year-over-year in Q1 2023, further to 30% in Q2 2023 and slightly declined in Q3’23. Even, though growth decelerated due to tough comparables, we expect CTV to be a long-term opportunity for the Company, as ad dollars continue to shift from linear to CTV. Positive signs exist with CTV publisher count growing by 27% in Q4’23 and 15% in Q1’24.
c. Business model and KPIs
PubMatic generates revenue from publishers by charging them a fee/take rate which is typically a portion of the revenue generated by publishers from the sale of ad inventory using the SSP.
Take rates in the ad tech industry are dispersed with high variability in the fees charged by SSPs and DSPs; while such fees generally lack transparency. According to an article from Adalytics, on average, up to 35% of media buyer bids for ad slots go to DSPs and SSPs.