Digital advertising is a secular growth trend now in its second decade -- and one poised to last for another decade or more. Global spending estimates are calling for an additional $200 billion or so to migrate from traditional marketing to digital in the next few years and reach some $650 billion by the year 2024.
On the inevitable march toward digital ads gobbling up $1 trillion in sales every year, The Trade Desk (TTD -0.54%) has been one of the biggest winners from the advertising technology (adtech) industry. The stock price is up over 2,500% since the IPO in 2016. It isn't the only company aspiring for great things in adtech, though.
Three smaller stocks with promising potential are Magnite (MGNI -3.30%), PubMatic (PUBM -2.27%), and DoubleVerify (DV -2.11%). Let's find out a bit more about these three adtech companies.
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1. Magnite: The sell-side counterpart to The Trade Desk
Magnite, a product of the merger between Rubicon Project and Telaria early in 2020, is now the largest independent sell-side ad platform. The Trade Desk is a buy-side platform, meaning it helps marketers find and bid on advertising slots. Magnite and its partners are the counterparty to that transaction, content producers and the like that list ad times for sale to marketers.
Following the marriage that created Magnite, this company hasn't let its foot off the gas consolidating the fragmented adtech software industry to itself. Earlier in 2021, it completed its acquisition of connected TV (CTV) platform SpotX, doubling down on the rapid move from traditional cable and broadcast TV formats to internet-based streaming. Then in July, Magnite said it acquired SpringServe for $31 million, a small outfit that SpotX had invested in last year that provides things like ad inventory routing and customized viewer experiences.
Magnite had an excellent showing during the second quarter of 2021. Revenue excluding TAC (traffic acquisition costs, payments made to ad sellers to route inventory through the Magnite platform) was $100 million, up 79% year over year when including SpotX results from the year prior. Just over a third of those sales came from CTV, which grew 108% year over year when including SpotX -- illustrating just how quickly the TV industry is transforming its status quo as consumers are spending more time streaming content than ever before. Revenue excluding TAC is expected to notch a healthy quarterly sequential increase to at least $112 million for Q3.
While one of The Trade Desk's strengths is a squeaky clean balance sheet featuring zero debt, Magnite has racked up $719 million in loans (as of the end of June 2021) due to its acquisitions, offset by cash and equivalents of $193 million. Nevertheless, this will balance out over time because Magnite is highly profitable, having generated an adjusted EBITDA margin of 32% through the first half of this year. And trading for about 10.5 times trailing-12-month sales, the stock looks like a long-term value as it continues to post double-digit percentage revenue growth from its leading position as a sell-side software technologist.
2. PubMatic: The new kid on the block with a hip look
PubMatic is a newcomer to the publicly traded adtech stock scene. It completed its IPO in December 2020 and got off to a hot start. But the stock in this mostly sell-side software firm has since sold off and is trading near its all-time lows as a public concern.
That doesn't mean PubMatic has been performing poorly thus far. On the contrary, its Q2 2021 earnings report was impressive, with revenue of $49.7 million representing an 88% increase from a year ago. The Q3 outlook was pretty good too, calling for year-over-year revenue growth of at least 35% to $51 million to $53 million. The full-year 2021 sales outlook was also hiked to a range of $205 million to $209 million (previously $195 million to $200 million), representing growth of at least 38%. PubMatic ended June 2021 with cash and equivalents of $122 million and no debt.
So what gives with the stock's recent declines following the hot IPO? Customer concentration risk is one thing that has some investors concerned, a common problem for small emerging software outfits like this. As a sell-side platform, PubMatic is highly reliant on buy-side companies The Trade Desk and Alphabet's Google and its subsidiaries for ad placements through its channels. Mobile and omnichannel video ads also made up two-thirds of sales in Q2. Video advertising is a hot trend right now, but PubMatic's reliance on this area could run out of steam if the migration to internet-based TV slows.
But management is optimistic and even provided a preliminary 2022 revenue growth forecast of about 25%. Along the way, PubMatic is already delivering superior profitability. Gross profit margin was 74% in Q2, leading to an adjusted EBITDA profit margin of 37%. That's a fantastic showing for a tiny company like this. At just under eight times trailing-12-month revenue, PubMatic is starting to look like a real value.
3. DoubleVerify: Increasing the value of the digital ad ecosystem
DoubleVerify isn't a buy- or sell-side platform, but rather software that helps marketers get the most out of their ad campaigns. As its name suggests, the company verifies the effectiveness of advertisements using data analytics, measures the quality of ad impressions on viewers, and provides fraud protection that ensures actual people wind up seeing media campaigns.
Multiple segments of the digital advertising industry are propelling DoubleVerify higher, from CTV to social media. Also an IPO stock from April 2021, this adtech outfit is off to a hot start. Q2 revenue was 44% higher than a year ago to $76.5 million as its software gets integrated throughout the digital ad ecosystem. It's picking up plenty of new customers all the time, and it recently launched an open beta using its anti-fraud services on popular social video site TikTok. As a result, management slightly upgraded full-year expectations for sales to now be up about 34% from 2020 to $325 million to $330 million.
Like its counterparts in adtech, DoubleVerify is also highly profitable. Adjusted EBITDA in the second quarter was $21.2 million, good for an adjusted EBITDA profit margin of 28% (and 30% through the first half of 2021) even though the company is spending plenty of money to develop and market new products. Paired with the $333 million in cash and equivalents and no debt on balance following the IPO, things are looking great over at DoubleVerify.
This financial strength and momentum comes at a premium, though. Shares currently trade for just shy of 20 times trailing-12-month sales. Nevertheless, this software company provides critical measurement metrics for the ad industry that help companies get the most out of their marketing efforts. This is a top name in adtech to keep an eye on as the world continues to move from traditional to digital ads.
