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This Digital Ad Software Tech Stock Is Beating the Nasdaq Index -- Is It a Buy?

By Nicholas Rossolillo – Sep 22, 2022 at 7:42AM

Key Points

  • DoubleVerify's stock is outperforming many of its peers this year.
  • Fast and steady growth is the key, but the small company is also profitable.
  • Keep an eye on its valuation and free cash flow per share.

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DoubleVerify's software for digital marketing is knocking it out of the park.

The digital advertising industry has been in turmoil this year. The angst started when Apple -- in a move to improve user privacy -- made big changes to app tracking transparency. Next, the Federal Reserve began hiking interest rates in its efforts to fight against inflation. But that has also increased the odds the U.S. will slip into a recession, and recessions generally feature lower advertising activity.

But one digital ad software business has been doing quite well: DoubleVerify Holdings (DV -0.76%). It hasn't been totally immune to the bear market of 2022. Its shares are down 19% so far this year, but that's still significantly better than the 27% plunge of the Nasdaq Composite index. More importantly, the business itself is booming.   

A unique stock in the digital ads space

Many investors have become familiar with digital ad companies that operate ad marketplaces like Alphabet's Google and The Trade Desk. Names like Magnite and PubMatic, which help publishers list ad space for sale, have also become popular with investors. But DoubleVerify is something different: It's a software company that helps these ad marketplaces and publishers measure the effectiveness of their ad campaigns.

There is competition in this space. Some small, privately-owned operations offer similar suites of solutions. Big-tech players including Google, Amazon, and Oracle also have some competing offerings. But DoubleVerify offers a differentiated set of tools. It's also deeply integrated with well over 1,000 different customers -- including many of the companies mentioned above, as well as social media platforms like Meta and TikTok.

Within DoubleVerify's software suite are tools that measure ad viewability and effectiveness, detect and prevent fraud (like from web-crawling bots), and ensure a company's ads are displayed to the intended audience. In short, they make digital advertising more efficient and profitable. And because the company's revenue is largely based on ad volume, it's not dependent on ultimate ad monetization like many other digital ad companies whose stocks have been clobbered this year. As digital marketing gradually increases in prevalence, DoubleVerify should be able to continue winning.

Steady growth and profitability

Speaking of winning, DoubleVerify has put up some fantastic financial results since its IPO in the spring of 2021, in spite of growing concerns that a recession may be coming. Revenue grew 43% year over year to $110 million in the second quarter, building on its 44% growth rate in the same period of 2021. Even better, DoubleVerify was profitable with an adjusted EBITDA profit margin of 31%. Its free cash flow can be highly volatile from year to year, especially at this early stage of the company's journey, but it generated free cash flow of $12.9 million during the first six months of 2022.  

With the company now turning a profit, it isn't in need of outside financing to fund operations at this time. But it's worth noting DoubleVerify had nearly $224 million in cash and equivalents on balance at the end of June and no debt. Also of note, its full-year outlook for 35% revenue growth at the midpoint of guidance implies that a slowdown is coming.  

I see two items that investors should keep a close eye on here -- items that are worth watching in the cases of most small and fast-growing software companies. First is valuation. With an enterprise-value-to-free-cash-flow ratio of 90, this stock trades for a premium. The market has left little room for missteps in business growth execution.

Second is stock-based compensation to employees, which totaled just over $20 million so far this year. Revenue and free cash flow measured on a per-share basis should help to account for actual growth for existing shareholders, and so far, all looks well on those fronts. But it's worth monitoring to see if DoubleVerify can drive down this non-cash expense over time.  

Even in this bear market, I think DoubleVerify is an intriguing story worth considering. If you decide to buy, expect lots of bumps on the road. Only invest in this company if you intend to hold the stock for years to allow time for this business to mature. But after its last earnings update, I'm considering adding to my small position in this unique digital ad industry player. 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients have positions in Alphabet (C shares), Amazon, Apple, DoubleVerify Holdings, Inc., Meta Platforms, Inc., PubMatic, Inc., and The Trade Desk. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, DoubleVerify Holdings, Inc., Magnite, Inc, Meta Platforms, Inc., PubMatic, Inc., and The Trade Desk. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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