Performance Advertising Shift Will Limit Margins While OEM Partnerships Will Offer Only Modest Relief

Catalysts

About Taboola.com

Taboola.com operates a large performance advertising platform that connects advertisers with consumers across the open web using AI and first party data.

What are the underlying business or industry changes driving this perspective?

• Although Realize is showing improving advertiser success and scaled advertisers grew 4 percent with 11 percent higher average revenue per advertiser, the shift from native to performance advertising outside search and social will require sustained product investment and higher customer acquisition costs. This could cap ex TAC gross profit growth and pressure EBITDA margins over time.
• While rising app based and OEM distribution through partners like Apple, Samsung and messaging platforms helps offset declining search led traffic, heavier reliance on a concentrated set of device and news feeds partners increases renewal risk and revenue sensitivity to contract terms. This limits long term revenue visibility.
• Despite strong uptake of AI driven tools such as predictive audiences, Abby and deeper LLM integrations, competitors in search, social and retail media are simultaneously enhancing their own AI performance stacks. This could slow Taboola's share gains in the 55 billion dollar addressable market and constrain double digit revenue aspirations.
• Although Taboola News and other on device placements are growing faster than the core business and are structurally better insulated from LLM driven changes in search behavior, monetization per user on these surfaces may plateau as advertisers re prioritize budgets toward walled gardens. This could temper future net margin expansion.
• While strong free cash flow conversion above 70 percent and aggressive buybacks improve per share metrics, foreign exchange headwinds, rising hosting and marketing spend for Realize and exposure to volatile advertiser segments, including international demand, may keep earnings growth only in the mid single digit range even if reported revenues trend higher.

Assumptions

This narrative explores a more pessimistic perspective on Taboola.com compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Taboola.com's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 1.3% today to 0.9% in 3 years time.
• The bearish analysts expect earnings to reach $18.6 million (and earnings per share of $0.05) by about January 2029, down from $25.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $55.7 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 63.8x on those 2029 earnings, up from 50.5x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 15.5x.
• The bearish analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Realize appears to be at an inflection point, with scaled advertisers up 4 percent and average revenue per scaled advertiser up roughly low double digits. If this trend is sustained, it could push ex TAC gross profit and adjusted EBITDA well above mid single digit growth and support meaningful share price appreciation over time, particularly as operating leverage improves earnings.
• Secular shifts away from search and social toward performance advertising across the open web, combined with Taboola’s differentiated first party data and app based traffic that is less exposed to LLM driven search disruption, could allow the company to capture a growing share of the 55 billion dollar opportunity. This could accelerate long term revenue and net margin expansion.
• Taboola News, OEM integrations and in app placements on partners such as Apple, Samsung and messaging platforms are growing faster than the core business and are structurally insulated from search disintermediation. This could steadily raise high quality supply, advertiser budgets and monetization per user, supporting higher revenue and ex TAC gross profit.
• Sustained improvements in free cash flow conversion, consistently above 70 percent of adjusted EBITDA, combined with a strong balance sheet and a 270 million dollar revolver, give management capacity to continue aggressive buybacks beyond the 14 percent of shares already repurchased. This can lift earnings per share and potentially re rate the valuation upward.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Taboola.com is $4.0, which represents up to two standard deviations below the consensus price target of $4.8. This valuation is based on what can be assumed as the expectations of Taboola.com's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $2.2 billion, earnings will come to $18.6 million, and it would be trading on a PE ratio of 63.8x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $4.43, the analyst price target of $4.0 is 10.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.