PubMatic (PUBM 1.75%) attracted a stampede of bulls when it went public on Dec. 9, 2020. The advertising technology company listed its shares at $20, and they started trading at $25.12, eventually soaring to a record high of $69.92 on March 1, 2021.
But today, PubMatic stock trades at about $12. A $2,000 investment at the listed IPO price would have briefly blossomed to nearly $7,000 before withering to $1,200. Let's see why the bulls retreated -- and whether there's any hope for a longer-term turnaround.
Image source: Getty Images.
Why did the bulls fall in love with PubMatic?
Many adtech companies fall into one of two categories: sell-side platforms (SSPs), which help publishers manage and sell their own ad inventories; and demand-side platforms (DSPs), which sell ad space across a wide range of platforms.
PubMatic operates an SSP that automatically connects publishers to ad buyers across PC, mobile, and connected TV (CTV) platforms in real time. At the time of its IPO, its top customers included Verizon, News Corp, Electronic Arts, and Take-Two's Zynga.
Larger digital advertising companies like Alphabet's Google and Meta Platforms bundle together SSPs, DSPs, and other tools, but they tend to lock publishers and buyers into their own ecosystems. To break free from those walled gardens and reach a broader audience across the "open" internet, publishers often turn to independent SSPs like PubMatic.
PubMatic's revenue rose 15% in 2019, then jumped 31% in 2020 and 53% in 2021. That acceleration was mainly driven by the rapid expansion of its CTV market, which benefited from the rollout of more ad-supported streaming video services. Its trailing-12-month net dollar-based retention rate -- indicating how much existing customers are spending -- also climbed from 109% in 2019 to 149% in 2021.
PubMatic's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin more than doubled from 20% in 2019 to 42% in 2021, and it remained firmly profitable on a generally accepted accounting principles (GAAP) basis.
All of those qualities seemed to make PubMatic a great investment, and the bulls -- emboldened by the buying frenzy in growth stocks in early 2021 -- pushed its shares to their all-time high.
How did the bears drive away the bulls?
But at its peak, PubMatic's enterprise value hit $3.3 billion, or 15 times the revenue and 35 times the adjusted EBITDA it would generate in 2021. Those high valuations made it an easy target for the bears once its growth cooled off.
In 2022, its revenue only grew 13% to $256 million as its adjusted EBITDA margin fell 4 percentage points to 38%. Its trailing-12-month net dollar-based retention rate dropped to 108%, which was lower than its retention rate in 2019.
For 2023, analysts expect revenue to decline 1% to $253 million as its adjusted EBITDA margin shrinks to 24%. It's also expected to turn unprofitable on a GAAP basis.
PubMatic blames that disastrous slowdown on broader forces. During its second-quarter conference call in early August, CEO Rajeev Goel said the "current macro environment is forcing publishers and buyers to do more with less." Soft desktop and mobile ad sales also offset the consistent growth of its CTV business.
Furthermore, PubMatic seems to be suffering a more severe slowdown than its industry peers. Magnite (MGNI 4.43%), the largest independent SSP provider, increased its revenue by 24% in 2022 and is expected to generate 6% growth in 2023. Analysts also expect Magnite to maintain a higher adjusted EBITDA margin of 31% this year.
Will PubMatic's stock bounce back?
PubMatic now trades at less than 2 times this year's sales and 8 times adjusted EBITDA. It looks a lot cheaper than it did in early 2021, but Magnite also trades at about 2 times this year's sales and 8 times adjusted EBITDA.
Therefore, investors looking for a cheap SSP play in the adtech sector might favor Magnite -- which also owns a growing CTV business -- over PubMatic. PubMatic's low enterprise value of $470 million might make it a more compelling takeover target than Magnite, which has an EV of $1.3 billion, but investors shouldn't buy a beaten-down stock in hopes of a buyout.
PubMatic's insiders notably sold nearly three times as many shares as they bought over the past three months. However, Magnite's insiders also haven't bought a single share during the same period. That subdued insider sentiment at both companies suggests independent SSP platforms will remain out of favor until the macro environment improves. PubMatic might eventually bounce back, but it could take a few years instead of just a few quarters.
