Ad tech firm PubMatic (PUBM 1.75%), like many businesses reliant on advertising income, was affected by a downturn in the advertising industry over the past year. Uncertain macroeconomic conditions, such as rising inflation, contributed to 11 consecutive months of declines in ad spending.
The advertising industry finally snapped this streak in May with a 2.5% increase in ad spending, up from April's 1.4% drop. This sign of a reversing industry trend coupled with a cooldown in inflation suggests a rosier 2023 for PubMatic.
In fact, PubMatic's shares climbed past $19 at the time of this writing, from a 52-week low of $11.73 reached on May 4, but still off its high of $23.60. So is now the time to invest in PubMatic? Let's dig into the company's performance to understand whether it makes a good long-term investment.
PubMatic's ups and downs
First, some context to understand why PubMatic shares hit a 52-week low in May. The ad industry slowdown left the company wary of how much revenue growth it could attain in 2023. Consequently, PubMatic delivered a weak outlook for second-quarter revenue, forecasting between $58 million to $61 million, a drop from the prior year's $63 million.
Moreover, despite years of profitability, PubMatic exited Q1 with a net loss of $5.9 million compared to net income of $4.8 million in the previous year. These factors understandably caused the stock price to drop.
In response, the company implemented cost cuts, and estimates 2023 capital expenditures to drop over 60% from 2022. CFO Steve Pantelick stated, "We expect profitability to improve as the year progresses driven by the full effect of our cost reductions, optimizations and typical seasonal increases in ad spend."
In addition, PubMatic's recent performance suggests it can do better than its Q2 forecast. First-quarter revenue came in at $55.4 million, beating the company's Q1 estimate of $50 million to $52 million as well as last year's $54.6 million. And in 2022, despite the advertising industry downturn, PubMatic generated record revenue of $256.4 million, representing double-digit growth over 2021's $226.9 million.
PubMatic's revenue opportunities
PubMatic's strong growth in connected TV (CTV) represents another reason for optimism. Its Q1 CTV revenue experienced a year-over-year increase of more than 50%.
Thanks to the secular trend of consumers shifting away from traditional linear TV to streaming content, spending on U.S. CTV ads is forecasted to jump 21% to $25.1 billion in 2023 from last year's $20.7 billion. CTV ad spending is expected to climb to $40.9 billion by 2027, providing a multi-year tailwind for PubMatic.
The company is capitalizing on this CTV shift with the May launch of Activate, software that injects automation into the CTV ad buying process. According to PubMatic, about 60% of CTV advertising deals are done through traditional contracts called insertion orders. Activate streamlines this process, and CEO Rajeev Goel describes the product as "a catalyst for faster CTV and online video growth over the medium term... resulting in higher gross and net margins" for PubMatic.
The company's revenue opportunities don't stop with CTV. Many retailers look to ads on their website as a source of additional income, a trend called retail media. This is a bigger market than CTV, with retail media ad spending forecasted to grow from $45 billion in 2023 to over $106 billion by 2027.
PubMatic is not only pursuing retail media ad dollars, it's taking a broader view of the opportunity by delivering ad technology to any transaction-based business, such as travel and food delivery providers. PubMatic refers to this broader opportunity as commerce media, and has secured clients such as Lyft and Tripadvisor. Commerce media is one of the fastest-growing areas of PubMatic's business.
More reasons for PubMatic optimism
The company also possesses a healthy international business, which has grown rapidly in the years since the COVID-19 pandemic struck. PubMatic's 2019 international income totaled $36.5 million, and represented 32% of total revenue. This year, international revenue of $22.8 million constituted 41% of Q1's $55.4 million in revenue. PubMatic's Q1 international income already represents 62% of 2019's full-year international revenue.
A global business means PubMatic benefits from the multi-year tailwind of worldwide digital ad spending growth, forecasted to reach nearly $602 billion this year, up from 2022's $550 billion. Global digital ad spending is expected to continue growing annually, hitting $871 billion by 2027.
Moreover, PubMatic possesses a healthy balance sheet. The company exited Q1 with $577.5 million in total assets compared to $271.1 million in total liabilities. It also held $173.2 million in cash, cash equivalents, and marketable securities, and no debt.
PubMatic's aggressive cost cutting should return the company to profitability soon. Combined with the advertising industry's multi-year growth, PubMatic is well-positioned for long-term revenue expansion, making its stock a worthwhile investment.
