Finding 10-bagger stocks isn't easy. To qualify, a stock needs the right combination of high growth and profitability, or at least profit potential. Additionally, it helps if the stock in question is undervalued or ignored by Wall Street and has a small market cap so it still has room to grow by 10 times its current stock price.
One stock that fits these criteria is Perion Network (PERI 0.76%), a fast-growing adtech stock that looks undervalued, based on its current GAAP price-to-earnings ratio of just 15.
What is Perion Network?
Perion Network offers a number of services in adtech, first and foremost connecting ad buyers and publishers through its Intelligent Hub (iHub).
Most adtech companies operate as a demand-side platform (DSP), which helps optimize campaigns for advertisers, or supply-side platforms (SSP), which helps optimize inventory for ad publishers. But Perion is different. It claims its own niche in the sector through the iHub, which efficiently connects ad buyers and sellers, acts as a real-time bidding engine, and helps the company's own profitability by optimizing the utilization of its ad supply.
In addition to the intelligent hub, Perion helps high-impact advertisers deliver premium experiences. It has features like in-game advertising during live events, QR codes for scanning, and a "connected cart" that can advertise products based on available inventory at the brand's retail partner using the QR code to connect the customer.
On the recent earnings call, CEO Doron Gerstel explained that those premium ads deliver outsize results for advertisers. Its premium ad units generate a 400% jump in site visits and a 400% conversion rate, which translates into 25 times more sales conversions than a standard ad unit. The premium ad units also come with roughly double the cost per thousand impressions (CPM), at $32, of a standard ad unit, showing how Perion can convert its search traffic into profits.
The company also has its own ad-tracking technology that doesn't use cookies. It's called SORT and is gaining popularity as Alphabet's Google is expected to ban third-party cookies on Chrome by 2024. Customers using SORT, which Perion is currently giving away to build customer relationships, increased 11% sequentially in the third quarter to 140 and saw a 25% increase in spending. SORT has also provided customers like Daimler AG's Mercedes-Benz an increase in click-through rates of more than 50%, showing the value of the technology.
Strong growth in a difficult environment
Digital-ad spending has slowed sharply during the year, as recent reports from Alphabet and Meta Platforms show. Even adtech platforms like Pubmatic are seeing the same headwinds.
However, Perion continues to gain market share in the industry and it puts up fast growth, even in a challenging environment. In the third quarter, revenue increased 31% year over year to $158.6 million, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) nearly doubled to $33 million. Adjusted EBITDA margins after traffic-acquisition costs increased from 37% to 51%, showing the company's business model is scaling efficiently.
On the bottom line, the company continues to post strong profits, with GAAP net income surging 141% year over year in Q3 to $25.6 million, or a 16% margin. Gerstel said the company can grow and take market share partly because of its small size. It's much easier for it to grow revenue by 30% than it is for a company the size of Alphabet.
Perion currently has a market cap of just $1.17 billion, so it would only have to grow to a valuation of $12 billion to 10x. At that market cap, it would still be significantly smaller than adtech leader Trade Desk, which is currently valued at $24 billion.
The company also raised its guidance in the third-quarter report and now sees full-year revenue rising 32% at the midpoint to $630 million-$635 million. It also expects a 72% increase in adjusted EBITDA of at least $120 million, so the stock is valued at just 10x this year's expected EBITDA.
Considering Perion's low valuation, fast growth, ramping profitability, and large addressable market, the stock looks like a good candidate to 10x over the next decade. If it continues to grow at its current rate, the stock has nowhere to go but up.
