These are exciting times at PubMatic (PUBM -2.27%) but you wouldn't know that by looking at its stock chart. Shares of the digital advertising upstart have lost around 42% of their value since the beginning of 2022.
Before you let a sinking market price turn you away from this stock, you might want to take a closer look at the business. Here are some recent signs of success the company keeps flashing that suggest its stock price could put up big gains in the years to come.
The right product for the moment
The old days of contacting a publication to bid on available ad space are nearly over. Automated bidding and placement, or programmatic advertising is the new norm. A recent report from eMarketer found that demand for programmatic ad spending spiked last year in the U.S., rising 41.2% year over year to $106 billion.
As its name implies, PubMatic helps content creators automate real-time auctions for available ad space on their publications. This could be a website, smartphone application, a connected TV application, or all three. The important thing to note is that PubMatic's growing even faster than the market for programmatic advertising. The company reported 2021 sales that soared 53% year over year to $227 million.
Image source: Getty Images.
Don't worry about the deceleration
PubMatic stock fell hard after the company reported fourth-quarter results because its rapid growth rates are contracting. For 2022, the company forecast revenue growth of just 25% over last year's performance.
PubMatic's pace of growth in 2022 won't be as amazing as it was last year but it's still outpacing the competition. We know this because overall spending for programmatic ads will probably grow much slower than PubMatic's client base this year. A recent report from eMarketer suggests programmatic ad spending will climb 16% this year.
Investors will be glad to know it looks like PubMatic's growing client base is attracted to a better product and not an unsustainable marketing blitz. The company was able to report adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) that worked out to an impressive 42% of total revenue last year.
Now that's a bargain
PubMatic has a $1.0 billion market cap at recent prices. That's a very attractive price for a growing company that expects adjusted EBITDA to reach about $103 million this year.
Even on a GAAP basis, PubMatic shares trade at just 19.6 times trailing earnings. This is a valuation you normally see pegged to mature businesses in mature industries expected to grow by mid-single-digit percentages.
PubMatic stock has been under a lot of pressure this month because the company forecast less earnings growth for 2022 than Wall Street analysts had been expecting. Luckily, PubMatic is a stock to buy and hold for at least five years, not the next nine and a half months.
The pandemic created a unique set of favorable conditions for PubMatic that led to higher growth rates than investors should probably expect from now on. That said, investors can reasonably expect growth at a double-digit annual percentage for many years to come. The stock might not recover in 2022, but it has a great chance to outperform the market.
