Omnichannel Video And Mobile Growth Sparks Optimism, Despite Profit Margin Squeeze And Market Challenges

Key Takeaways

• Strategic partnerships and expanding deals with major players like Roku and Disney+ Hotstar hint at significant revenue growth potential.
  
• Focused investments in technologies like CTV and programmatic advertising are poised to address market shifts and boost profitability.
  
• Shifts in bidding strategies, macroeconomic softness, customer concentration, heightened competition, and rising investments introduce volatility and margin pressures, challenging PubMatic's financial predictability and growth.

Catalysts

A technology company, engages in the provision of a cloud infrastructure platform that enables real-time programmatic advertising transactions for digital content creators, advertisers, agencies, agency trading desks, and demand side platforms worldwide.

• The rapid growth in revenue from omnichannel video, including CTV, mobile, and desktop devices, by 19% over the previous year suggests a strong demand for PubMatic's offerings in these areas, which could drive future revenue growth.
  
• Mobile app revenue growth outpacing the expected market growth rate, nearly doubling the anticipated 13%, indicates a solid competitive advantage and market share gains in mobile advertising that could lead to continued revenue increases.
  
• The expansion of deals with significant customers like Roku and Disney+ Hotstar, and the company's ability to attract new marquee customers, may lead to further revenue growth as these partnerships mature and expand.
  
• Investments in supply path optimization, CTV, commerce media, audience targeting, and performance marketing reflect strategic initiatives likely to address long-term market shifts towards programmatic advertising, enhancing revenue and profitability.
  
• Increased monetization of impressions and higher overall CPMs (cost per thousand impressions) in CTV and mobile signify operational efficiency and pricing power, which could positively influence net margins and earnings in a growing digital ad market.

Assumptions

• Analysts are assuming PubMatic's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.1% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $15.7 million (and earnings per share of $0.34) by about October 2027, down from $20.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 71.3x on those 2027 earnings, up from 37.7x today. This future PE is greater than the current PE for the US Media industry at 13.6x.
• Analysts expect the number of shares outstanding to decline by 2.01% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.16%, as per the Simply Wall St company report.

Risks

• The late DSP bidding change introduced a short-term revenue impact due to the shift to exclusively first price auctions, indicating potential volatility in revenue recognition and challenges in forecasting. This could impact revenue predictability and margins if not managed or adapted to quickly.
  
• The macroeconomic softness noted, particularly in specific verticals like technology and computing, automotive, travel, and arts and entertainment, suggests demand-side risks that could lead to reduced ad spending, impacting PubMatic's revenue and growth rate in affected sectors.
  
• The dependency on a few major customers and verticals for substantial revenue growth poses a concentration risk. Any loss or reduction in spending by these key players could significantly impact revenue and profitability.
  
• Increased competition in the ad tech market, especially as more companies expand into programmatic advertising, could pressure margins and slow revenue growth if PubMatic fails to maintain its technological edge or loses key supply or demand partners.
  
• The anticipated increase in CapEx and operating expenses to support long-term growth, coupled with the challenges in obtaining quick returns on these investments in emerging products and new partnerships, could pressure net margins and free cash flow in the short to medium term.

Valuation

• The analysts have a consensus price target of $20.38 for PubMatic based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $365.5 million, earnings will come to $15.7 million, and it would be trading on a PE ratio of 71.3x, assuming you use a discount rate of 6.2%.
• Given the current share price of $15.21, the analyst's price target of $20.38 is 25.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.