Are you spending less time in front of screens this year than you did in 2021? How about 2020?
Now that it's relatively safe to leave the house, the digital advertising industry that thrived in previous years isn't getting as much positive attention from investors as it used to. As a result, shares of the digital advertising specialist, Pubmatic (PUBM +1.60%) have tumbled to all-time lows.
NASDAQ: PUBM
Key Data Points
This was a good stock to buy before rising interest rates hammered growth stocks. Here's how picking it up off the floor could do wonders for your portfolio down the road.
A well-run business
Growth stocks have been under a lot of pressure in general because nobody wants to wait for positive cash flows anymore. That's because rising interest rates could heavily discount the value of those future cash flows, and nobody knows how high the Federal Reserve will need to go to tame soaring inflation.
Pubmatic is a fast-growing ad-tech company, but it's also an extraordinarily well-run business with cash flows that have been reliably positive. In the first quarter, the company reported net income on a generally accepted accounting principles (GAAP) basis that worked out to 9% of revenue, and cash flow from operations came in at an impressive 35% of revenue.
The company's bottom-line performance is all the more impressive when you consider the company increased its employee roster by 40% year over year in the first quarter while expanding its platform into retail media.
Pubmatic is steadily eating the competition
Pubmatic isn't the only company out there with a sell-side advertising platform, and it isn't the largest either. Its lead competitor is Magnite (MGNI 0.98%), a company with more than twice as much top-line revenue as Pubmatic.
PUBM Revenue (TTM) data by YCharts.
With a quick glance at the competitors' top lines, it may appear that Magnite is the clear leader. What the revenue charts don't tell you, though, is that Magnite is gaining new clients through acquisition while Pubmatic is developing its tech in-house. For example, Magnite splashed out with a $1.2 billion acquisition of SpotX last year to expand its footprint in the lucrative connected TV (CTV) space.
In the first quarter, the addition of SpotX's clients allowed Magnite to report CTV revenue that rose 253% year over year to $42 million. Over the same time frame, Pubmatic reported CTV revenue that jumped more than 400%, and Pubmatic didn't have to acquire a competitor to make it happen.
For the first quarter, Pubmatic reported a 140% net-dollar retention rate that tells us its clients are eager to spend more on its platform. Either Magnite isn't measuring its own retention rates, or they're so disappointing that management decided not to share them.
Growing into a large and fragmented market
According to MAGNA Global, a media intelligence company, global digital ad spending is expected to reach $514 billion this year and soar to $627 billion in 2024. In addition to this big tailwind, a great deal of consolidation in the fragmented sell-side could push Pubmatic forward in the years ahead.
Pubmatic has long focused on using alternate identifiers to reduce any incoming threat from Alphabet's decision to halt the use of third-party cookies on Google's Chrome browser. The demise of cookies on the leading browser isn't going to be a problem for Pubmatic because more than two-thirds of total revenue already comes from mobile, online video, and CTV.
With strong profits and a way to overcome its industry's biggest challenge, Pubmatic could stay several steps ahead of the competition for years to come. This doesn't guarantee outperformance from the stock, but it sure has a pretty good chance to produce market-beating gains for long-term shareholders.
