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1 Recent Advertising Tech IPO to Watch

By Matthew Frankel, CFP® and Jon Quast – Oct 5, 2021 at 6:46AM

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Here's an ad tech company you might not have heard of yet.

Advertising tech company PubMatic (PUBM 0.06%) isn't quite as well known as other ad tech stocks like The Trade Desk (TTD 4.97%), but it may be worth a closer look. In this Fool Live video clip, recorded on Sept. 27, Fool.com contributor Jon Quast gives viewers a rundown of PubMatic's business and why it's a recent IPO on his watch list. 

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Jon Quast: It's an advertising technology company and it's opposite of The Trade Desk. Many investors might be familiar with Magnite. This is a direct competitor to Magnite. Magnite is the larger player in the space, but PubMatic has gotten to where it is organically, whereas Magnite has gotten there through acquisitions. That's one of the things that's interesting to me. It's a usage-based software-as-a-service company.

Basically it partners with publishers to fill their ad slots, and the more ad slots that there are, the more things that are being filled, the more its software as a service is being used, the more revenue it can generate. Some of the reasons that I like this and let me share my screen.

Why is it not pulling up this? Well, let me just say that since I can't pull it up. The global market for digital ads is growing at a very fast rate. It's growing at about a 15% compound annual growth rate. That is something that you want to see for these players, $650 billion, just a massive market. As you would expect, PubMatic's revenue is growing fast, up 88% year over year in the most recent quarter. I'm going to try to show the right page this time.

Here we go. This is from their investor presentation here, they've got a lot of customer growth right now, which is one of the reasons that I like it. This is the most recent quarter and it says that it has this is just one part of the business that's connected TV. It's partnered with 114 connected TV partners. That is up from just 80 connected TV partners in the previous quarter. That is massive growth quarter over quarter, so they're winning a lot of new customers.

As a software-as-a-service company, they do track the net dollar-based retention rate. I think Brian Feroldi says that's the good one. That's the one that we want to see. This as the increasing customer spend over time, that includes customer churn. In 2019, their dollar-based retention rate was 109%, 2020 it was 122%. As of the most recent quarter, it was 150%. Customers are staying, they're growing their customer base and existing customers are spending a lot more over time.

When you look at the management team here, this is also very interesting. Look here, we have co-founder and CEO, founder and chairman, co-founder, president of engineering. There's also another co-founder on the board of directors. This is a management team that kept a lot of its early founders. What's really interesting here is Amar Goel. He is the chairman. Like I said, he owns nine percent of the company. His brother Rajeev owns 8.6% of the company. This is a management team that is very much invested in this company. Glassdoor, Rajeev gets a 92% approval rating, 4.4 out of five stars on Glassdoor. These are as good of Glassdoor ratings as I have seen. This company appears to be a very strong workplace that really helps explain why their organic growth has been so great compared to Magnite.

Now, when you look at the financials here, what I want to point out is that this is the gross margin up here that is very high, 75%, that is about as high as you can get for any company. Net profit margin, very profitable even though it's a small company. I think it's around $200 million in annual revenue, very small company, but a 21% bottom-line profit. Its cash and equivalents, this mark right here showing $90 million, in reality, they have some short-term marketable securities brings a total balance up to over $122 million and they have zero debt on the balance sheet. A very financially strong company.

Right now, the stock has been hammered, I think over concerns over Google and Apple changing up the ad tech market and its valuation has really dropped low. If you look at its price-to-sales, less than eight times sales for a company that is highly profitable and growing fast. This P/E ratio here, that's not quite the right one. I think it's closer to 50, but still trading at a very decent valuation for a fast-growth company in a fast-growing market, that has really great fundamentals.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of Apple and has the following options: short November 2021 $140 calls on Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Magnite, Inc, PubMatic, Inc., and The Trade Desk. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Stocks Mentioned

PubMatic Stock Quote
PubMatic
PUBM
$15.84 (0.06%) $0.01
Alphabet Stock Quote
Alphabet
GOOGL
$100.44 (-0.55%) $0.55
Apple Stock Quote
Apple
AAPL
$147.81 (-0.34%) $0.50
Alphabet Stock Quote
Alphabet
GOOG
$100.83 (-0.44%) $0.45
Magnite Stock Quote
Magnite
MGNI
$12.66 (6.65%) $0.79
Trade Desk Stock Quote
Trade Desk
TTD
$54.49 (4.97%) $2.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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