LT's avatar
$18.8m follower assets
September Idea Competition - PubMatic $PUBM
image
Summary
PubMatic is a supply-side platform (SSP) led by disciplined founders/management. They grow profitably, and through methods unincorporated by competitors. The digital ad TAM is expanding coupled with the company increasing market share. There are several factors to why smaller players will be consolidated out:
  • unable to provide SPO
  • not reached critical mass to scale cost
  • publishers will consolidate SSPs for operational efficiency
Outflows had downward pressure on stock (VCs exited after lock-up); just 60% institutional ownership currently.
PubMatic can grow 20%+ profitably for years, with CTV optionality to grow above this. 7x EV/EBITDA is a great value for a strong performer. They will fortify their position as the SSP leader and grow market share.
The Business
PubMatic is a founder(s) led small cap company with a long-term strategy to grow conservatively. Publishers list their ad inventory on their platform and integrate with ID solutions to appropriately tag their audience. Buyers use ID solutions to match inventory they bid on. Identifying the audience is one way PubMatic increases return on ad spend. Alternative ID solutions are important as we enter a post-cookie world.
PubMatic is also investing in supply path optimization (SPO). Ad inventory is filtered to serve only the highest quality. PubMatic enters in agreements with DSPs, advertisers, and agencies allowing them to buy ad inventory from their platform and negotiate terms to increase their ad spend on their platform.
Advertising is cyclical. Higher volume taps into operating leverage, thus higher profit margins in H2.
image
The business is diversified across regions and industries. There are few customer, sector, or region risks. The highest customer concentration in 2021 was 17% of total revenues, down from 28% in 2019 .
image
Financials
Q2 2022 marked their eight straight quarter of 20%+ YoY growth and 13th straight quarter of positive GAAP net income. They dropped their FY22 revenue guide but increased EBITDA guide (38% margin). They have 130% net retention rate; on average, clients spent 30% more this year. They ended the quarter with $183M in cash and no debt.
ROIC ranged from 19-27% since IPO in Dec 2020.
image
They set modest guidance and beat.
image
PubMatic has 70% gross margins and nearly 40% Operational Cash Flow margins.
They are in a strong growth mode and India-based engineering headcount increased 37% in the last 12 months. The team is growing in line with revenue:
image
Competitive Advantages
Owned Network Infrastructure
They process trillions of ad impressions/year. Instead of outsourcing to a 3rd party, they built their own servers. This provides operating leverage and better performance vs competitors. Maintenance and growth have expenses, but they’ve achieved impressive operating leverage:
image
They ~quadrupled the number of impressions processed while halving the cost to process each impression.
Data and Machine Learning
PubMatic collects data about each impression and feeds this into their ML models in real-time to modify pricing of high-quality ad inventory, increasing yield for publishers.
Their ML models also predict which bids will be higher quality and chooses which to present to the buy-side (SPO).
SPO
SPO is intended to ensure that marketing dollars are spent efficiently by processing only the highest quality inventory. Smaller players will naturally be consolidated out if they cannot provide this.
image
Management

PubMatic was founded in 2006 by 4 co-founders.
As of Apr 2022, Rajeev and Amar Goel control 63% of the total voting power. The Goels spent two decades building the company; they don’t want to see it derailed for short-term goals.
image
IDFA and Cookies

Apple’s IDFA threw off many ad-dependent companies, but had minimal impact on PubMatic:
  • Majority of revenue is derived outside iOS
PubMatic works with publishers who own the 1st party relationship with their user vs 3rd parties who are no longer allowed to collect data.
image
Stock Performance

· Stock is down 38% since its IPO in Dec 2020 (down 74% since Feb 2021 peak)
· PubMatic’s EPS increased 307%
· Revenue increased 98%
· Shares outstanding increased 10%; this makes sense given the increase in headcount.
image
Comparing insider ownership in 2021 to table in management section, early VCs exited the stock after lock-up . This put downward pressure on the stock and implies less overhang now.
image
Valuation

  • $105M FY22 EBITDA
  • $890M market cap
  • $180M cash and no debt
  • Deduct $26.5M upfront payment for Q3 acquisition
  • $736.5M EV
The company trades at 7x EV/EBITDA and is growing 20%+.
Joey Hirendernath's avatar
Great pitch! Sharing this with @ntfinvesting @stockopine as I know they have follow $PUBM
Conor Mac's avatar
Solid work man, this felt like more than 750 words of insight, so that's the litmus test!
Ben's avatar
Great posted. Earned a follow. What do you think about $PUBM competition?
LT's avatar
@rpinvestments here's the full write up if you're interested in learning more. There's a small section on relevant competitors in my eyes.

Author

Related