Stocks with 10x potential tend to have a few things in common.
They generally have high growth rates, relatively low market caps, and track records of beating estimates. It helps if they are undervalued, though growth stocks tend to have speculative valuations.
Perion Network (PERI 0.18%), an ad tech firm best known for its Intelligent Hub, meets all of those criteria. Its stock price has surged through the pandemic, propelled by a boom in the ad tech segment as well as its own strong performance. Since the start of 2020, the stock is up more than 250%, but after management raised its guidance for this year and the next, it looks poised to continue its upward run in 2022.
Perion Network's market cap is still less than $1 billion, and the company is on track for at least 40% revenue growth to a total of $460 million this year. Despite those numbers, it trades at a price-to-earnings ratio of just 23, showing the market is still underestimating the growth story here.
That market behavior was on display recently when the company raised its guidance, but its share price fell 9% because management announced a secondary stock offering. The company had initially planned to raise $100 million, but the offering was oversubscribed and resulted in $180 million in new capital. When I asked CEO Doron Gerstel about the offering during an interview about the company, he said that there was $500 million worth of demand for new shares, indicating strong investor interest.
While that offering did dilute shareholders by nearly 20%, it also put the company in a strong position to make acquisitions and invest in technology in pursuit of its goal of reaching $1 billion in revenue by 2025. That would amount to compound annual growth of 25% -- twice the expected growth rate of digital ad spending.
Perion is an underrated tech platform
In the last few years, Perion Network has reformulated its strategy under new leadership, focusing on developing its Intelligent Hub, which connects ad buyers with ad publishers. While most ad tech companies function as either demand-side platforms or supply-side platforms, Perion differentiates itself by serving both sides of the advertising ecosystem. Additionally, the company has rolled a number of new features to offer a premium ad experience, known in the industry as dynamic creative optimization, through connected TV, including ads featuring QR codes that viewers can scan to immediately buy an item. Perion refers to this as the "connected cart" -- the customer's online shopping cart with a retailer like Target or Amazon is, in essence, linked to the ad.
The company also offers on-screen advertising within live televised events, another way it's giving its clients opportunities to get their ads in front of consumers.
Those kinds of innovations help explain why Perion Network is expecting 115% growth in video and connected TV revenues this year. Those categories should continue to be a tailwind for the company as they've been for much of the ad tech industry.
Additionally, with third-party cookies becoming a thing of the past, Perion introduced its own cookie-less targeting solution, called Smart Optimization of Responsive Traits -- or SORT -- in October. Early results show SORT is more effective than third-party cookies, with a 77% higher click-through rate and a 21% higher engagement rate. That's a promising development, as Alphabet's browser Google Chrome will soon ban all third-party cookies.
The path to 10X returns for Perion
Nearly all of Perion Network's ad tech peers trade at higher valuations than it does. For example, The Trade Desk, which is the leading demand-side platform, has a price-to-sales ratio of 40, even though its revenue growth and profitability are comparable to Perion's. By comparison, Perion trades at a P/S of around 2. It's not hard to imagine that multiple expanding if the company continues to execute the way it has been during the pandemic.
The market still seems skeptical that Perion can maintain its recent momentum, but a string of successful acquisitions, (including video monetization firm Vidazoo), the development of new technology like SORT, the secular growth trends of digital advertising and connected TV, and the $180 million it has in its war chest put the company in an excellent position.
Its profit margins should also continue to improve thanks to the scalability of the Intelligent Hub, and its goal of $1 billion in annual revenue by 2025 seems well within reach. Should it reach that target, a price-to-sales multiple of 10 would give it a market cap of $10 billion, or roughly 10 times what it is today.
While it's impossible to know what valuation multiple the market will put on Perion in the future, it deserves a higher one than it's getting today. If the company continues to execute, shareholders should be well rewarded.