What happened
Shares of advertising-technology (adtech) company PubMatic (PUBM 2.19%) were up 19.7% in January, according to data provided by S&P Global Market Intelligence. And as of 1:30 p.m. ET on Friday, PubMatic stock is up 28% so far in 2023 and ahead of the 8% gain for the S&P 500.
The news was surprisingly thin for PubMatic in January. But I believe the stock was undervalued at the start of the new year, and maybe the market was waking up to this value proposition.
So what
In early January, much of PubMatic's management exercised stock options and sold shares, which occasionally concerns investors. But many of these sales were part of a pre-scheduled sales plan called Rule 10b5-1. It's a common way for insiders to avoid the appearance of selling on insider information but still raise the money they need for personal finances.
CEO Rajeev Goel was among those who sold in January, selling nearly 5,000 shares of Class A stock for about $12.96 per share. But if you're wondering about his commitment to PubMatic, Goel still owns more than 17,000 Class A shares and almost 2.4 million Class B shares, directly and indirectly. Selling 5,000 shares is insignificant compared to what he still holds.
Not everyone was a seller of PubMatic in January. Investment firm BlackRock is a recent buyer. On Aug. 31, 2021, it owned nearly 615,000 shares of PubMatic, which was 3.1% of the company. Then, in a January filing, BlackRock revealed it recently increased its stake to 6.3%, more than doubling it.
PubMatic is a profitable company. And as the chart below shows, its price-to-earnings (P/E) ratio was frequently cheaper than the average for the S&P 500 in 2022. So maybe BlackRock increased its stake because it was trading at a bargain valuation.
PUBM PE Ratio data by YCharts.
Now what
The 800-pound gorilla in the adtech space, Alphabet, just reported that its quarterly revenue was only up 1% year over year, reflecting a slowdown in the advertising space. And that's why PubMatic stock is trading at a below-average valuation: Investors know things are slowing down. Indeed, PubMatic is also guiding for just 1% year-over-year growth in the upcoming fourth quarter.
Investors should keep in mind that Alphabet's results demonstrate this is an industry problem, not a PubMatic problem. Moreover, PubMatic is in a strong position financially to wait out the slowdown.
It will report fourth-quarter results on Feb. 28. Investors wanting to dig deeper into the health of the business should look at ad impressions, or how many ads were displayed via PubMatic's software.
In the third quarter, trailing-12-month ad impressions were up 79% year over year. If PubMatic is still taking market share, you would expect ad impressions to keep going up. This may not be reflected in revenue if the price-per-impression falls. But increasing ad impressions would bode well for the company when the ad industry eventually bounces back.
