You probably don't know anything about LiveRamp Holdings (RAMP -3.77%), but LiveRamp Holdings knows a lot about you. Well, not you exactly, but rather an anonymous profile of you and millions of others. This information could make this software-as-a-service (SaaS) specialist an essential player in programmatic advertising going forward and richly reward its shareholders in the process.
With advertising giants like Facebook, Alphabet, and Amazon out there, why would little LiveRamp -- with only a $2.5 billion market capitalization -- thrive going forward? Simply put, it offers something valuable those other players can't.
How programmatic advertising works
Traditional advertising mediums include TV, radio, billboards, and newspapers. Advertising on these channels casts as wide a net as possible, hoping to catch something. With programmatic advertising, by contrast, targeted ad campaigns are supplied on demand based on what can be known about the viewer in question.
It starts with a content publisher. Examples include Disney's Hulu in streaming video, Spotify in streaming audio, and the New York Times in digital print. Those publishers generate ad revenue by selling slots to interested advertisers. Supply-side platforms like The Rubicon Project fill ad slots by negotiating prices with demand-side platforms like The Trade Desk and provide a specific targeted ad to you, the consumer. This is what programmatic advertising is.
If any of these companies can provide a better conversion rate (did you buy the product?) in the ads they program, they can charge more. But to achieve those superior results, they need superior data on individual audience members. Specific interests, purchasing history, and life situations are all relevant data points for improving targeted ads. But most companies only have one data point on you -- which often isn't enough.
What if companies could pool their data together to create more complete customer profiles? That's what LiveRamp does.
How LiveRamp does it
Consumer-facing companies are extremely competitive. They'd benefit from having a rival's first-party customer data, but they aren't willing to mutually help a competitor. This problem can be solved through an intermediary.
LiveRamp is a SaaS middleware company. Middleware is something that works invisibly behind an operating system, connecting to an external application. It would be as if houses in a neighborhood each ran separate pipes to fill the community swimming pool. LiveRamp plumbs the pipes to the LiveRamp pool.
LiveRamp starts by making a company's customer retention management (CRM) data anonymous. This data can then be segmented according to factors like age and gender, but in a way that doesn't invade privacy. From there, it can be piped into the pool. Customer data is then matched with data from other sources, creating a more complete picture of you, the consumer.
Have you ever entered your email at a brick-and-mortar retailer to receive digital receipts? Have you given your email to a website to access free content? Your in-store shopping history can now be linked to your online activity for better-targeted ads.
The potential reward
Here's what LiveRamp can offer that other advertising giants can't: neutrality. It's not a publisher, it doesn't sell or buy ads, and it doesn't have goods or services beyond its software. The likes of Facebook, Alphabet, and Amazon have their hands in these jars. If these tech giants offered a service comparable to LiveRamp, other, smaller companies would likely fear giving their data over where it could end up repurposed and create a competitive disadvantage. LiveRamp doesn't have the conflict of interest the tech giants do.
Furthermore, as LiveRamp gains customers, it creates a network effect. Each new customer brings their data, contributing to and improving the customer profiles already in the pool. This makes LiveRamp more valuable over time. Conversely, if LiveRamp was to lose customers -- perhaps due to cutbacks in corporate spending -- its service would be less compelling.
In its fiscal 2020 third quarter (reported on Feb. 5), LiveRamp said it grew customers 7% year over year to 770. Long term, it's targeting the world's top 3,000 enterprises, so there's plenty of room for growth. And it's already integrated with 35 demand-side platforms, and platforms representing over 90% of the supply side ad inventory. So it appears the programmatic ad world has already chosen LiveRamp, validating its long-term prospects.
A full 80% of LiveRamp's revenue comes from subscription products, and annual recurring revenue grew 28% in the third quarter to $286 million. What's more, its net-retention growth (the number that tracks existing customer spend) has accelerated over the past three quarters, and currently sits at 119%. The company also has a stalwart balance sheet of $767 million in cash and zero debt, which I believe mitigates downside risk.
LiveRamp's unique role, growing adoption, and financial profile are why I'm betting this stock can beat the market going forward.