Over the past year, PubMatic (PUBM -0.43%) has posted impressive profitability. In this video clip from "The Rank" on Motley Fool Live, recorded on March 28, Fool.com contributors Jamie Louko, Travis Hoium, and Matt Frankel discuss how the advertising tech company is a stronger investment in the long term than its competitors.
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Jamie Louko: It is an advertising technology company. If you've heard those words before, it's probably been followed by or after The Trade Desk (TTD -2.44%), but to be clear, it's not a competitor to The Trade Desk. There are two sides of the ad tech space. There's the buy-side and the sell-side.
The buy-side focuses on helping advertisers find advertising space on publishing platforms or people looking to sell advertising space. The Trade Desk does that on the buy-side. It is the leader on that side. The sell-side is where PubMatic exists and it helps publishers basically find the best bang for their buck. It's looking for the advertisers willing to spend the most money without deteriorating the customer experience. That's what they do and right now they have about 3-4% market share on the sell-side.
It's a big industry, but unlike The Trade Desk, it has a really big competitor being Magnite (MGNI -1.48%). So both PubMatic and Magnite are basically the top two on the sell-side. However, I personally think that PubMatic is a much stronger investment for two key reasons.
First is its organic growth. Magnite has historically been a very acquisitive company and so while it's putting up triple-digit growth numbers and really high-growth numbers, almost all of that is coming from its acquisitions. In its most recent quarter, I believe Magnite posted just 10% organic revenue growth, which is a stark contrast from its triple-digit revenue growth that it pulled out on the front-end.
Compared to Magnite, they were putting up, I believe it was, let's see, in the fourth quarter it was 34% and in the full year, it was 53% revenue growth. So they are growing much faster on an organic basis, which Magnite just hasn't been able to do.
The second reason that I like PubMatic more is that it has developed its own tech stack in-house and that has resulted in amazingly impressive profitability. For the full year, its GAAP net income was $56.6 million and that compares to $227 million in revenue. So we're talking about a 20% net income margin on a GAAP basis and it's a $1 billion-dollar company.
This is a small company that is pumping out free cash flow and net income and so it's really, really strong. Their CEO is Rajeev Goel and he's created a lot of businesses and founded a lot of businesses beforehand and in an interview, he said that one of the important things that you had learned from those experiences was losing money can be a really bad thing, obviously. That seems like a no-brainer.
Travis Hoium: Especially right now when public markets are kind of closed up.
Louko: Exactly. He took that lesson albeit seemingly obvious, he took that lesson and made that a cornerstone of PubMatic, and from the get-go, he wanted this to be an extremely profitable company and that's why they created their tech stack, so they could pump out these impressive margins despite being such a small company.
With those two competitive advantages over Magnite, I think that as the advertising technology space continues to grow, I think PubMatic is better positioned to benefit from it, and with those stellar margins that can reinvest the crap out of its own business and be very strong and take market share.
Matt Frankel: I kind of feel like companies that focused on profitability before the recent market downturn are in an inherent advantage right now.
Louko: One hundred percent, yeah.
Frankel: Not just PubMatic. All the companies that were just prioritizing growth at any cost are now going to scramble to beat profits at any cost and companies that don't have to make that big transition are definitely at an advantage right now.