In this podcast, Motley Fool analyst Jason Moser and host Dylan Lewis discuss:
- Private equity's plans to take website builder Squarespace private at $6.9 billion.
- The Biden administration's reported plans to raise tariffs on EVs, solar equipment, and medical supplies, and why automakers in China aren't too concerned.
Motley Fool analyst Asit Sharma and host Ricky Mulvey take a look at PubMatic, an advertising company creating trillions of impressions per quarter and facing off against some trillion-dollar companies.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on May 13, 2024.
Dylan Lewis: This episode of Motley Fool Money is brought to you by Squarespace, which will be brought to you soon by, Permira of private equity. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool Analyst Jason Moser. Jason, thanks for joining me.
Jason Moser: Hey, Dylan, glad to be here. How's everything?
Dylan Lewis: Things are good. We've got some deal-making going on in private equity, we've got the Global EV Race heating up, and we've got to look at a lesser-known player in online advertising today. Jason, I love it when we check the news on a Monday morning, and we've got a fun deal to unpack, certainly the case today. Website building suites, Squarespace will be going private, thanks to an all-cash deal from private equity firm Permira, valuing the company at around $6.9 billion. Seems like a nice time for us to reflect on Squarespace as a publicly traded company, it has not exactly been a world-beater and went public at a tough time during the peak of the pandemic. What do you think Permira sees in Squarespace's business?
Jason Moser: It's not been the greatest time for Squarespace, a very competitive industry in website building, and what comes with that. I think that Permira likely sees a couple of things, I think first and foremost, they see this massive market opportunity. When you look at Squarespace's S1, for example, back when they went public in 2021 when they filed that S1, based on data from Intuit, they were estimating around 800 million small to medium-sized businesses in a medium-term addressable market of $150 billion at least. Those are big numbers, and that's not something that is all Squarespace's opportunity. This is where the puck is headed, right? When it comes to retail, when it comes to commerce, it's headed online, and if you own a small or medium-sized business and you don't have a web presence, you are leaving something out there, you need to get on that. Squarespace obviously is one tool that can help get that done, yes, it's been a difficult time for the company as a publicly traded company, but I would imagine that Permira sees this attractive market opportunity, and maybe has some ideas in regard to strategy in ways that they can perhaps improve the business, when you're chasing a market opportunity of $150 billion as quoted, it's understandable to want a little slice of that.
Dylan Lewis: To be clear, Squarespace is not alone in being a company that has struggled in this zone, I think the nearest competitor for them is a company like Wix. Both of those businesses are, it depends on your basis type stocks, where if you've owned it over the last two years or so, you're probably feeling pretty good if your basis is tied to some of the pandemic highs, probably not feeling quite as good.
Jason Moser: Yeah.
Dylan Lewis: But if you expand that out, and you get out just beyond the site builders and you start thinking more about companies that specialize in e-commerce, bring BigCommerce, bring Shopify in the mix, similar story there too. How do you look at these companies that are good at one specific thing in the zone, versus the more built for shopping, more e-commerce, more breadth-oriented offerings?
Jason Moser: If you look at the website building opportunity, that on its own probably isn't the most attractive out there. We saw, for example, Block, formerly Square, acquired Weebly sometime back, which was essentially the same thing, I even remember building a website on Weebly back in the day, and I was impressed with how easy it was, and how robust you can make it, and they had the freemium version, and then you can upgrade and pay subscription fees to get more features. And I think that's the key to it all, on its own, maybe it's not the most attractive, but when you consider the opportunity to build additional value add features, and additional revenue streams, and so thinking about things like ads, or payments, or what have you, then it starts to become a little bit more palatable because again, those are large market opportunities on their own, and contend to be more recurring, given the nature of the actual business in that online space.
Dylan Lewis: If you're looking for details, shares are up 13% to just over $43, the deal price was $44. Jason, it seems like there's a high level of confidence that this one is going to be happening, there is not a lot of uncertainty being priced into the stock right now.
Jason Moser: No, I don't think so. This is a situation where you'd be at Squarespace competing against some very tough incumbents out there, Shopify among others. When you look at the fundamentals of the business, it's not a bad business, but it's a young business and it's still trying to establish its own market position there, they've grown revenue at about 17% annualized over the last three years. Not bad, but probably not something necessarily to write home about. Still working toward profitability, but worth noting, that it is cash-flow positive even after you account for stock-based compensation. I think that when you look at this acquisition, it's not the craziest valuation for a business like this, it's somewhere around between six and seven times sales. To me, it does make sense to go ahead and take a chance on this now when the valuation is looking a little bit more attractive, given that Squarespace has had such a difficult time as a publicly traded company.
Dylan Lewis: It's a nice opportunity for us to check in a little bit on the private equity space. In researching the show, I saw a piece from S&P market intelligence, that at year-end, of 2023, private equity firms were sitting on nearly 2.6 trillion in dry powder, a lot of cash on the sidelines, basically double what they had in 2016, and I think an all-time high for the category. This is not the first time we have seen a tech company get taken private, especially one that had come out to some fanfare on the public markets. Qualtrics was out as a public company for about two years before it got scooped up in 2023, I think Toshiba was also taken private in 2023. Do you expect that we'll see some more announcements like this with how much money is sitting on the sidelines right now, Jason?
Jason Moser: Yeah, that's a lot of cabbage insight. I think just by that alone, yes, we are likely to see more deals that are in the future. Permira, they didn't want that money just sitting there, that money has to go to work doing something, and I think now we will likely see more deals materialize, we've got a lot of companies out there with very interesting prospects, but just very young business models, I think Squarespace fits into this category, some interesting prospects there, which is still a young business finding its way, and now we're in a bit more of a risk-off environment, it's not like we've seen over the last few years where investors just had this unquestionable thirst for risk, it's a little bit of a different situation now, what that means, what comes along with that, valuation starts to look a little bit more enticing. So it makes a lot of sense that private equity is taking a very close look at a lot of these businesses, I would imagine we'll start to see slowly here through the rest of 2024 in into 2025, I'd imagine we'll be talking about some more deals here on the show in the coming months and quarters.
Dylan Lewis: Over to a space where business might be a little bit tougher going forward, EVs reports this week that President Biden will announce a new set of tariffs on EVs, solar equipment, and medical supplies coming from China in parts to protect American industry and also in the interest of national security. Jason, EVs are getting the headline and are really showing up in a lot of the reporting on this, but I think we do need to put it relatively plainly. There are not a lot of EVs coming into the United States from China right now.
Jason Moser: No, not at all. I think it's somewhere in the neighborhood of a couple of thousand, it's not even material, and that rings true for most of the markets where these tariffs will occur. This is a recurring theme we've seen over the last several years, has been for a lot of companies that are looking to reduce their dependence on China through supply chains, figuring out ways to diversify their businesses away from dependent necessarily on that Chinese economy, but we've seen Apple making big inroads with India, for example, not only for consumers, but in regard to production as well. I think you mentioned the word headline, I think this is a headline, but there's not a whole heck of a lot more to it, on its own, this stuff isn't terribly impactful, like you said, we're not bringing a lot of EVs in from China, the solar cell market, not a big deal there, it's not something where this is going to impact one side terribly, but it seems to me at least they're trying to hit this before it becomes a problem; we're talking about things like solar and EVs and whatnot, we're talking about markets that are still developing in representing attractive growth opportunities, and so just trying to get ahead of this before it does become a problem, and we become too dependent on an economy outside of our own.
Dylan Lewis: I think the concern here is just that the sheer market dynamics of the US is generally at a higher price point for most of the EVs that we're seeing, we know a lot of the cars that are coming out of China are a bit cheaper, while it does not have an immediate impact. I do know when we look at things like tariffs and trade negotiations, Jason, there tends to be a little bit of, you do this, I do that. I can't help but wonder what type of response we may see related to these tariffs, because I think at present the tariff is about 25%, that could escalate up to about 100% under this new plan, I have to imagine that China will respond to that, and there will be some effect for companies in the United States.
Jason Moser: I suspect you're right. A tit for tat deal there, a lot of politics, and even more so, a lot of diplomacy that comes with things like this. We see two different aspects of this from the economic side of things, but then also the political side of things, and speaking of headlines, these are headlines, I suspect we're going to see more and more of this type of back-and-forth here over the next several months because if I remember correctly, there's I think an election in November.
Dylan Lewis: I've seen some reporting on that.
Jason Moser: Relative to modest consequences, I'm not sure, I think this is one of those, and we will continue to see the back-and-forth nature of it, and I think the key for things like this all boils down to diplomacy. You don't want to look at this as we just want to go it on our own, but by the same token, there is a protectionist nature here when it comes to these developing markets, and we want to make sure that we are not overly reliant on anyone in particular, and the history with China, and the government there is. How do I put this diplomatically, Dylan, it's volatile [laughs]. Let's just say it's volatile. I'd imagine we'll continue to see this back-and-forth. But hopefully, it's nothing that's too terribly debilitating for either side.
Dylan Lewis: Fair to say that businesses that have a fair exposure to China, that volatility will continue.
Jason Moser: I suspect, and I think we're going to continue to see language riddled throughout these earnings calls over the next several quarters. Companies again, they're trying to diversify away from that reliance on that China's supply chain, and that makes perfect sense. Particularly when we've seen the impacts when those supply chain were so dependent on one particular entity, one particular economy in regard to supply chains, and then those supply chains break, it can have really long-reaching impacts and that's something worth avoiding if we can.
Dylan Lewis: Our final story for the news roundup for some retail investors, the times and the portfolio dashboards are changing. Schwab's TD Ameritrade migration nearly complete. Over the weekend, I think just shy of two million TD customers moved over to Schwab. Jason, marks the end of an era for some folks in their investing journey. I saw a lot of people on X lamenting that they were so used to checking in on TD and are now being switched over to Schwab. Now that we finally have all these customers over, we know it was part of Schwab's grander strategy, how should we be looking at this?
Jason Moser: Well, I for one hope that this is it. Because I was a Scottrade user, Scottrade got acquired by TD Ameritrade and then I had to get used to TD Ameritrade and I was like, TD Ameritrade is not so bad. This is work, wait, now it's getting acquired by Schwab. Fortunately, I guess I was spiked over to Schwab much earlier, so I've had a chance to get familiar with that user interface. I will say whether it's web-based, or app-based, I think Schwab has a terrific interface. I'm able to get everything done I want to get done, but this is really a story of the strong getting stronger. Schwab is one of the biggest financial entities out there in the world, and when I talk about big, we're talking about 35 million active brokerage accounts. You're talking more than five million workplace participant plans. You're talking about two million banking accounts and close to nine trillion dollars in client assets. This is a massive company and bringing TD Ameritrade into the fold, it's understandable. Consolidation in this space is something we've been talking about for a while, so clearly Schwab saw a lot of value there in TD Ameritrade. To your point there, in seeing the reactions on Twitter or wherever else about people disappointed that they have to leave that TD Ameritrade interface, and well, maybe that's just goes to show TD Ameritrade was doing something right. Maybe Schwab made a wise choice in bringing TD Ameritrade into the fold. But this absolutely is something that makes one of the biggest banks out there even bigger, even stronger. I think folks who've been moved over to Schwab, there's a little bit of a learning curve, but you get used to it quick, I'm sure.
Dylan Lewis: If there's anything that's true over time, that people hate change.
Jason Moser: We all do. We all do until we figure out, well, maybe it wasn't so bad.
Dylan Lewis: Jason Moser, thanks for joining me today.
Jason Moser: Thank you.
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Dylan Lewis: Coming up. The Internet economy is all about eyeballs. Up next, Fool analysts, Asit Sharma joins Ricky Mulvey for a look at PubMatic, an advertising company creating trillions of impressions per quarter, and facing off against some trillion-dollar companies. Asit, before we get into PubMatic, a lot of this Ad platform stuff is a little confusing. Can you explain what a sell side Ad platform does? Who are the customers?
Asit Sharma: Absolutely. A sell-side platform, Ricky, is a platform that represents publishers. Think about a company like Yahoo!, which is a company that PubMatic has had a long relationship with, that's a publisher. They have inventory on their web pages, and they want to sell that inventory. You can see that's differentiated from what we call the demand side. Those are advertisers who want to advertise and reach end-users. It's a pretty simple demarcation between the two. Publishers on one side, that's sell side, buyers are advertisers on the other side, that's the demand side.
Ricky Mulvey: This is one of those companies I've probably experienced, but maybe I don't know where. Where might I have seen a PubMatic ad?
Asit Sharma: Let's see if, again, you've been on any of Yahoo's sites, you'll likely have seen one of these ads, maybe News Corp. Any number of publishers with acronyms that really we don't come into contact with in the wild, so let me go to some other examples where you probably have seen some of the inventory that's represented on this platform. If you've played games on Zynga or Electronic Arts, we've seen those. Coming soon, Klarna. If you use Klarna, you'll see ads that are generated through PubMatic's platform. Same with Roblox, which also just announced a partnership with this company. If you've ever ventured onto over-the-top streaming sites, there several which PubMatic represents. AMC Networks, Barstool Sports, Major League Baseball, the Cox Media Group. Their reach is really pretty wide. I'm going to just say that if you spent more than a few hours on the internet or a connected device of some sort, you've probably seen an ad that came through a PubMatic server.
Ricky Mulvey: That's a lot of the internet, but this company claims they're doing 58 trillion impressions in a quarter, which sounds like a lot. How is that possible? I know you've listed their customers, but how is that even possible?
Asit Sharma: Well, think about, Ricky, not just the internet but connected TV, so we mentioned streaming. The number of hours that we as a society spend on the internet, on TV shows that aren't through traditional linear TV, through gaming, all of this amounts to an amazing, just incomprehensible amount of inventory. If you think of each click as representing a destination or each minute that you might spend on a streaming platform is a potential to see an ad? Multiply that out by maybe hundreds of millions of people or billions of people, since we've got eight billion people on the planet, and the math starts to work out crazily enough. I don't want to go back to the old days of seeing how much time I spent on my phone. I used to do this and installed a minimalist app after that. But when we start extrapolating the math, actually it's like that's not a big number at all.
Ricky Mulvey: Fool favorite The Trade Desk, which is on the other side of ad buying. So do these companies have a relationship? Is PubMatic selling ads to the buyers on The Trade Desk?
Asit Sharma: Yes, it is. In fact, PubMatic integrates with many platforms that are on the demand side, but The Trade Desk is one of the biggest integrations that it has. So think of it as being able to link both sides of that sell-side and demand side equation that I talked about. You have to play nice with the business model on the other side. That's something that PubMatic has done a great job of. They actually cooperated with The Trade Desk a few years ago when The Trade Desk was trying to promote its solution to cookies, we had all the signals that Google Chrome was going to dispense with cookies. They wouldn't follow you around the internet anymore. But some new technologies would have to come into place that would protect user privacy and also let advertisers get to us. PubMatic really worked with The Trade Desk and several other major players in the industry to have technology. It's called UID 2.0. It's just one of many that PubMatic works with, but having this kind of positive frenemy relationship with the other side, I think is one of the things that's enabled them to succeed.
Ricky Mulvey: A lot of the Internet economy is winner-take-all, or there's one or two big winners. And then all of the other companies seem to be left to the side. It's difficult to be the second most popular bookseller on the web, or the third most popular ride-hailing app in the United States. On this sell side, which is a space I've seen but I'm less familiar with, is PubMatic the big winner, or are there, or are there other competitors for investors to watch?
Asit Sharma: I think there's a big winner so far. There is Magnite, which was formed from the merger of two different companies several years ago. There's a company called Criteo. These are decent business models. But PubMatic, I think, has differentiated itself through really astute investments in technology which can get into, in a moment here. By doing that, I think they've won more credits with publishers. One example is they now have something that blurs the line between demand side and sell side. When they offer new product up to publishers, they, they get a pretty rapid uptake. I think you can consider them in terms of potential and profitability and probably to now share of the market is on this smaller sell-side. I can think of them as a top dog.
Ricky Mulvey: Speaking of technology investments, this is a rare tech company that's actually adding to its headcount this year. Growing their employee base by 11%. Now they're making moves on where those folks are going with generative AI. What do you make of this move in the investments PubMatic's making?
Asit Sharma: I think it's solid. On one hand, you can say, gee, maybe the company is having to spend more to make more money. But PubMatic has a history of investing during various cycles. This last cycle, when interest rates spike, inflation spiked and advertisers pulled back, all these stocks got pummeled. PubMatic was working on its platform during that time, they were actually a very early adopter of generative AI. They've got a team of engineers out in Poona, which is close to Mumbai in India. They were really into using this technology to become more efficient. It's a very cost-efficient company. It's always been profitable. It generates a lot of free cash flow per revenue dollar. I see this as really coming to the end of the cycle of investment in capital expenditure. I've had a chance to speak to the CEO, Rajeev Goel, a few times. In the last time I spoke to him last year, he told me, look, we are in an investment cycle and that's going to have its end as well. We'll have to start reinvesting in capex, capital expenditure, but for now, we've made those investments, now we have to optimize them. Part of that logically is hiring more engineers to reduce the cost of impressions for advertisers, which helps their bottom line too, because they sell more of these clicks. I think given their history, it's a move you can have confidence in, but you have to watch it too, they have to get a yield on that investment.
Ricky Mulvey: Because if you look at the income statement, as this company has dramatically grown revenue, it hasn't necessarily grown its operating income even though it's profitable. It's still may be experiencing growth pains or do they have a spending problem?
Asit Sharma: I don't think it's a spending problem historically, they actually have generated decent operating income, but we're I think a couple of years into that cycle now that I mentioned before, it's really the dip in advertising demand that hit their income statement and you see him solely coming out of that. The forerunner of that is cashflows. So free cash-flow hit a trough. It tripled in the last quarter. I think the margin on a book basis, a GAAP basis, is going to follow as now we see more advertisers spending. As that spend goes up, you'll see them capture the incremental profit. I think that's more of a cyclical thing when you look back at their entire history, even before they were a public company. We got a glimpse into that, into that when they had their S1 a few years ago. But I think the point behind your question is correct though if you're growing in a competitive environment, investors are going to want to see, if this is your narrative and that is their narrative, when this advertising spend keeps growing, it's got to show up in the bottom-line. We're going to need to see that bottom-line profit.
Ricky Mulvey: Then as we wrap up any other flags, good or bad, greed flags, orange flag, yellow flags, red flags you're keeping an eye on with this company?
Asit Sharma: I'm very fond of this company, Ricky. I've been following it for a number of years ever since it went public, recommended it in services I work in. But you have to be clear-eyed about this. The biggest threat to a business like PubMatic may not be what looks obvious. The obvious thing is The Trade Desk can step over into the supply side. In fact, as I mentioned, PubMatic has a product that's steps into the demand side. Trade Desk has its product to try to play with publishers themselves. But really the threat is more the big giants. We have Google, which is a force in the digital advertising field, and you have companies like Microsoft. Microsoft was chosen to act as sort of a sell-side and demand side platform for Netflix. That's a big chunk of business that rightfully maybe should have gone to PubMatic and The Trade Desk. So whenever Big Tech throws its weight around, that the little fish feel what it is to be a minnow. I think that to succeed The Trade Desk, less so, PubMatic more so is going to have to be able to navigate some waters where Microsoft can take what it's done with a Netflix and lift and shift that to another big entity. I know we're almost out of time, but I want to put in one pathway that PubMatic can actually do this. That's through retail media advertising. They've been very quick to work with a growing number of retailers who want to advertise or let their vendors advertise to customers. I think that's a wave that they will be able to ride. The second is something that Rajeev Goel has been very intent on, which is called supply path optimization. That's cutting out all the middlemen in the buying process. On the supply side, he's been pushing the company to do this, which is a higher-margin business. So each quarter you see more and more revenue is a function of supply path optimization and there's your margin, Ricky, in the long run, that's where a lot of the profit is going to come from.
Ricky Mulvey: But there is a significant problem with the connected TV story though. If you have Microsoft throwing its weight around with Netflix, because that's the story PubMatic's telling investors is, hey, more ad impressions on TV. This is where people are spending time and this is where we're selling. The part we're not hearing it as much about is there's trillion-dollar companies who are also looking at that market.
Asit Sharma: Totally. This is really such a opportunistic market, meaning that there's opportunity there for the tech players, but there's also opportunistic revenue from big tech giants. So the one thing I think PubMatic would answer back to that is it's a very fast-growing market. There's room for a smaller player to keep growing, even as giants take a bigger chunk of the business. But I think it's a risk when I think you're right to call that out as a risk, so we'll keep following it. I think it's got a bright future, but it's not like a slam dunk future. I think the company is really capable, management is capable, that product is good, the tech is good. But you have to put all those pieces together and get out there and fight against these big whales every day.
Dylan Lewis: As always, people on the program may own stocks mentioned in the Motley Fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
