It's April -- for many, that means the start of a new quarter, and an opportunity for investment firms to switch up their playbooks. Tech stocks, for example, fell out of favor and were beaten down for much of the last two quarters. Could this be the start of their recovery?
Three tech stocks I've got my eye on right now are The Trade Desk (TTD -2.44%), PubMatic (PUBM -0.74%), and Autodesk (ADSK -5.84%). Each member of this trio bucks the trend of unprofitability often seen in the sector, and are all profitable on a GAAP (generally accepted accounting principles) basis. Even if tech stocks don't make an across-the-board recovery soon, these all look like solid long-term investments.
Image source: Getty Images.
The Trade Desk
The Trade Desk and PubMatic are both involved with digital advertising but on opposites ends of the marketplace. Companies that want to advertise their products can purchase ad space through demand-side platforms. Businesses with ad space to sell -- like connected TV platforms, podcasts, or websites -- find buyers through supply-side platforms. The Trade Desk operates on the demand side, while PubMatic works on the supply side.
The Trade Desk offers tools like Measurement Suite and artificial intelligence engine Koa which work to guide advertising campaigns with data. Armed with feedback provided by these programs, clients can optimize their ad spending and connect specific sales to advertising areas, so they'll know which ads are working and which are not.
While advertising spending took a hit during 2020 because of economic uncertainty, it rebounded in 2021. The Trade Desk benefited from this wave: Its revenue grew by 43% last year to about $1.2 billion, and adjusted EBITDA was up 77% $502.7 million. However, due to a one-time $158 million stock-based compensation award to CEO and founder Jeff Green for long-term performance, GAAP operating expenses increased, which caused earnings per share to decline.
The Trade Desk garnered multiple accolades last year, among them Adweek's Reader's Choice Best of Tech award for its demand-side platform, and a top tier position in Gartner's Magic Quadrant for Ad Tech, with the best score in the space for "completeness of vision." With The Trade Desk, investors can be sure they are buying a best-of-breed company.
PubMatic
On the supply side, PubMatic boasts a particular advantage over many of its competitors: Rather than outsourcing its cloud infrastructure, PubMatic built its own. This approach has multiple benefits, such as specialized solutions and superior margins.
Connected TV (CTV) has brought in significant growth for PubMatic: in the fourth quarter, CTV revenue grew over 500% year over year. Over the course of 2021, the company's overall revenue grew 53% year over year, hitting $227 million. PubMatic's GAAP net income margin was 25% for the year, comparable to the margins of some more well-established tech businesses. Management is guiding for revenue growth of about 25% in fiscal year 2022, with hopes of bringing in $286 million.
While The Trade Desk is recognized as the demand-side leader, PubMatic is engaged in a battle for supply-side supremacy with Magnite. At $468.4 million, Magnite's 2021 revenue was nearly double that of PubMatic. But I believe PubMatic's in-house infrastructure offers significant technological advantages that will allow the company to more than catch up to its competitor. For evidence, take a look at PubMatic's cost of revenue per 1 million ad impressions, which has dropped by almost 50% over the past two years, from $1.12 in first quarter 2020 to $0.57 in fourth quarter 2021. At the same time, PubMatic has drastically upped customer outcomes, increasing ad impressions from 28 trillion in 2019 to 92 trillion in 2021. This has all given PubMatic the ability to adjust its pricing while maintaining its margins.
Between the two, there's plenty of advertisement space across the internet. But considering it's trading at only 26 times earnings, PubMatic stock is a steal.
Autodesk
Engineers and architects interact with Autodesk software practically every day. This vital product allows for the creation of blueprints, digital renderings, and mechanical designs of many buildings and products. Without Autodesk's contributions, many industries couldn't function, giving it the enduring status of a provider that must be paid in both good times and bad.
Image source: Getty Images.
In terms of age, Autodesk is much more mature than The Trade Desk or PubMatic. As a result, its growth numbers aren't nearly as flashy. Still, its 2022 fiscal year (which ended Jan. 31) was solid, with billings increasing by 16% to $4.82 billion. In addition, Autodesk is a cash-generating machine with a free cash flow (FCF) margin of 34%.
Management's fiscal 2023 guidance was bright, with billings projected to increase 23.5% at the midpoint and FCF margin expected to rise to 43%. With all of that cash coming in, management intends to be opportunistic with its share repurchase program and offset the dilution created by its stock compensation plans.
For 32 times FCF, you can own a company that provides a vital product for its customers and is growing at an annualized rate of more than 20% per year. Autodesk is practically a no-brainer investment at these prices.
With all three stocks down by at least 35% from their highs despite solid business prospects for the year ahead, investors should jump to pick up shares of three great companies in April. These sale stock prices may not turn around instantly, but as each business continues to succeed, the stocks will eventually follow.
