In 2024, digital advertising is forecasted to grow 13% over last year, and account for nearly 70% of global ad spending. This is good news for ad tech firm PubMatic (PUBM +0.24%).
In fact, the advertising industry's strong growth is already helping the company. PubMatic experienced a phenomenal fourth quarter, sending its stock to a 52-week high of $24.19 on April 4.
Shares have dipped since then, so is now the time to buy PubMatic stock? To answer that question, let's take a look at the company to determine if it makes sense as a long-term investment.
NASDAQ: PUBM
Key Data Points
PubMatic's differentiated offerings
PubMatic's business model positions it to capture the growth in the digital advertising market. The company operates a software platform for website and mobile app owners, collectively called publishers, to generate revenue by displaying ads on their digital properties. It's what the ad industry calls a supply side platform (SSP).
PubMatic wisely extended its capabilities beyond SSP services, adding revenue-driving features that meet the evolving needs of its customers. It now provides a slew of other solutions that increase its value to publishers, as well as extending its offerings to advertisers.
For example, to capitalize on the consumer shift to streaming media, PubMatic launched a new feature last year called Activate. This service streamlines the process of buying connected TV (CTV) and other digital video advertising between publishers and advertisers. In Q4, Activate adoption rose 25% over the previous quarter.
PubMatic is also addressing a key concern in the advertising industry: the removal of third-party cookie tracking from the Alphabet-owned Chrome browser this year. These cookies are used to target ads to consumers based on their online activities.
The removal of third-party cookies is significant because Chrome possesses a 64% market share among web browsers, making it the world leader. It's of such concern that many in the ad industry are calling the change "Chrome-ageddon."
PubMatic produced a proprietary replacement for third-party cookies called Connect. This allows clients to avoid disruption from Chrome's change by shifting their ad targeting needs to PubMatic. Connect adoption in Q4 jumped 20% over Q3.
PubMatic's financial success
PubMatic's proprietary software enabled its Q4 revenue to increase 14% over 2022, reaching $84.6 million. But this top-line growth was just the start of a successful quarter. For instance, the company's Q4 net income was $18.7 million, up from $12.8 million in 2022.
PubMatic also enjoyed record free cash flow (FCF) of $52.8 million in 2023, a 38% improvement over 2022. FCF allows a company to fund investments in its business, pay debt, and repurchase shares. As a result, PubMatic bought back four million shares last year.
The company exited 2023 with a solid balance sheet. Assets totaled $695.2 million, with $175.3 million of that in cash, cash equivalents, and marketable securities. Contrast this against total liabilities of $399 million, and no debt.
Deciding on PubMatic stock
More growth lies ahead for PubMatic. The company estimates Q1 revenue of at least $61 million, a double-digit increase over 2023's $55.4 million. For the full year, PubMatic expects 2024 revenue to rise by a minimum of 10% over 2023.
The advertising industry's strong 2024 increase in digital ad spending is expected to extend into 2025. This serves as a multi-year tailwind for PubMatic's revenue growth.
Moreover, the consensus among Wall Street analysts is an overweight rating on PubMatic stock. In addition, these analysts are forecasting a median share price of $25.50, suggesting some upside for PubMatic.
The company has many factors in its favor. PubMatic's revenue growth illustrates success in capturing its share of the digital advertising industry's ongoing expansion.
Adding to this is the firm's healthy financials and its compelling digital advertising products. These factors combine to make PubMatic a worthwhile long-term investment.
