Taboola (NASDAQ: TBLA), an Israeli online advertising firm that generates most of its revenue from "chumbox" ads, made its public debut on June 30 after merging with the SPAC ION Acquisition (IACA).
Taboola's stock opened at $11.34, above its anticipated value of $10 per share, but gradually declined and closed at $10.35, which gave it a valuation of about $2.6 billion. Let's see if investors should buy this stock.
What are "chumbox" ads?
Chumbox ads, which are often associated with tabloid and clickbait articles, appear on webpages as grids of thumbnail images to drive traffic to other sites. Taboola often promotes these sponsored links as content "from the web" or videos and articles "you may like".
Image source: Getty Images.
Taboola's main competitor in the chumbox market is Outbrain, which also recently filed for an IPO. Both of these companies pay most their revenues back to the website publishers that display their ads. The two companies had been in talks to merge for several years, but the deal was cancelled last year.
How fast is Taboola growing?
Taboola's revenue rose 8% year-over-year to $303 million in the first quarter of 2021, beating its own estimates by $17 million. Its ex-TAC gross profit (which excludes the traffic acquisition costs it pays to publishers) grew 58% to $106 million, which also cleared its own expectations by $11 million.
It posted a net profit of $18.6 million, compared to a net loss of $23.9 million a year ago. It posted a positive adjusted EBITDA of $33.5 million, which also improved from its loss of $1.7 million a year earlier.
For the full year, Taboola expects its revenue to rise 9%-10% to about $1.3 billion. It expects its ex-TAC gross profits to grow 19%-22% and for its adjusted EBITDA to increase 32%-42%. All three estimates exceed its previous expectations, and suggest the stock might be undervalued at just two times this year's sales.
But what problems could Taboola face?
However, Taboola's stock is cheap because it faces four major challenges. First, internet users often consider its chumbox ads intrusive and misleading, making them a top target for ad blockers.
Second, Taboola's ads rely heavily on third-party cookies, which are now natively blocked on Apple's Safari, Microsoft (MSFT 0.66%) Edge, and Mozilla's Firefox. Alphabet's Google Chrome, the world's most popular web browser, plans to ban all third-party cookies in 2023.
In its F-4 filing, Taboola admits its "performance could decline" and it "could lose digital properties and advertisers" if third-party cookies are banned.
Third, Taboola has customer concentration issues. It generated a fifth of its revenue from Microsoft and its affiliates in 2020, while its top five digital properties generated about 30% of its revenue.
Its contracts have a typical length of about two years. If ad blockers continue to improve and third-party cookies are eliminated, many of Taboola's customers could move on toward other advertising solutions.
Lastly, it would have been smarter for Taboola to merge with Outbrain, thus monopolizing the chumbox market, rather than going public via a SPAC merger. Now it needs to compete directly against Outbrain -- which seemingly filed its IPO as a direct response to Taboola's public debut.
There are better advertising companies to invest in
I invest in companies if I admire their products or services. But I'm not a fan of Taboola's chumbox ads, and it might only be a matter of time before ad blockers and cookie bans render them obsolete.
Taboola offers advertisers a way to reach beyond the walled gardens of Google or Facebook, and it sees growth opportunities in other markets like mobile apps and connected TVs. But there are already plenty of ad tech companies that serve those newer markets, and some of them are much better long-term investments than clickbait companies like Taboola.
