Investors following Pubmatic (PUBM -2.27%) may have predicted the digital advertiser would eventually run into a roadblock in 2022. Once the Federal Reserve began to rapidly raise interest rates at a pace not seen in decades, the writing was on the wall. It was only a matter of time before the economy would decline, the advertising market would slow, and adtech companies would feel the resulting pain.
That happened when the company released its third-quarter results showing revenue growth slowing to 11% year over year, down from 27% growth in the second quarter. The stock fell 14% the day after the report. And since 2022 looks like it will end on a weak note for the company, you might ask yourself whether the stock will continue in the doldrums in 2023 or whether it will be a time for the business to shine.
Here are a few considerations.
Results could look ugly in 2023
Global central banks have aggressively raised interest rates this year to the point where the Organisation for Economic Co-operation and Development (OECD) believes global economic growth will decelerate substantially in 2023 with U.S. gross domestic product growth (GDP) slowing to 0.5%. Moreover, it projects many European countries, like Germany and the United Kingdom, will do worse. Even more distressing, should global banks miscalculate, the U.S. and Europe could easily topple into a recession.
Advertisers often respond to slowing GDP growth and fears of recession by slashing advertising budgets, as consumers are doing less spending in such an environment. For instance, data company Standard Media Index's October report showed advertising fell for the fifth consecutive month.
An advertising slowdown in the middle of the crucial holiday season is bad news for Pubmatic. As a result, the company gave guidance for anemic 1% revenue growth in the fourth quarter. Even worse, two ad companies, Group M and Magna, expect the advertising market to decline going into 2023.
Investors can expect lackluster results from Pubmatic well into the next year if these macro trends continue.
Pubmatic has strong fundamentals
The company has $166 million in cash and short-term investments to see it through dark times. And with no long-term debt on its balance sheet, investors are free from worrying about interest expenses burdening the company in a down market. In addition, unlike many companies with a sub-$1 billion market cap, it is profitable. It recorded $0.06 earnings per share (EPS) in the third quarter and is also profitable on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis. Analysts often use EBITDA, because they believe it provides a clearer picture of a company's core profitability than EPS.
Image source: Pubmatic.
Another Pubmatic advantage is that it develops, builds, and runs all the proprietary software and hardware on its ad platform, giving it significant cost savings over competitors that use public cloud infrastructure alternatives. Consequently, management believes it runs the lowest-cost infrastructure of any global ad company. Its cost advantage shows up when comparing its margins with adtech competitor Magnite.
Data by YCharts.
The company has also delivered strong free cash flow (FCF) growth.
Image source: Pubmatic.
The best part is PubMatic's currently optimizing its infrastructure for an advertising rebound. Once ad spending boomerangs higher, it should lead to even higher margins and FCF for the company.
Strong tailwinds from Connected TV
Television is undergoing a massive evolution as audiences migrate from subscription cable or satellite TV to streaming video through connected TV (CTV). And advertisers are increasingly following viewers to where they consume their content.
Marketing research company Statista projects CTV advertising spending will grow 33% to approximately $19 billion in 2022. And the CTV ad market achieved this growth in a terrible economy, so imagine what growth may look like as the economy rebounds.
This bullish trend is excellent for Pubmatic as its CTV growth far exceeds the market. Currently, CTV is the fastest-growing advertising segment for the company, up 150% year over year -- its sixth straight quarter of triple-digit growth. The CTV ad market is still relatively young, and this segment could drive PubMatic's top-line expansion for the next decade.
What should an investor do?
If you're an investor concerned with short-term stock performance, you should avoid Pubmatic. There is too much risk in the stock seeing further downside in 2023. However, for long-term investors, today is a great time to pick up a few shares and take advantage of the stock's 62% slide year to date.
