I am bullish on PubMatic (NASDAQ: PUBM) as its strong backing from Wall Street analysts, significant long-term growth potential, and deep discount to its average price target imply that it could be a good time to add shares.
PubMatic is an online advertising technology company that allows app developers and publishers to monetize their online businesses. The company’s platform puts video, apps, and video publishers into contact with ad buyers through automated systems.
Strengths
PubMatic operates eight data centers and 16 offices in the world. The company made a smart acquisition of the mobile ad server, Mocean Mobile, for $15.5 million in 2014.
It started storing most of its data on OpenStack private cloud-based servers in 2016. In 2020, the company launched the OpenWrap SDK to improve header bidding options for mobile ad publishers.
Recent Results
In the third quarter of 2021, PubMatic recorded revenue of $58.1 million, up 54% from $37.8 million generated in the third quarter of 2020. This is the fourth consecutive quarter in which PubMatic posted revenue improvement of above 50% and an adjusted EBITDA margin of more than 30%.
The company has a well-diversified portfolio across 20 verticals. The top vertical saw aggregate growth of 70% over-year-over. In addition, spending across every vertical (except political ads) increased by double digits in Q3 2020.
PubMatic posted GAAP net income of $13.5 million or earnings of $0.24 per diluted share, up from a net income of $6.2 million and a diluted EPS of $0.10 in the third period of 2020. The company also reported net dollar-based retention of 157% for the 12 months ended September 30, 2021, an increase of 110% from the year before that.
Net cash generated by operating activities was $26.4 million, an increase of 617% as compared to $3.7 million on a year over year basis. As of September 30, cash, cash equivalents, and marketable securities was $136.7 million, up 12% on a sequential basis, with no debt.
For the fourth quarter, PubMatic expects revenue to be in between $74 million and $76 million, up 32% to 35% from the fourth quarter 2020.
Valuation Metrics
PUBM does not have an extensive trading history, but it looks reasonable valued at the moment as its EV/EBITDA ratio is currently 17.1x compared to its historic average multiple of 32.2x, and its P/E ratio is 41x compared to its historic average multiple of 82.2x.
That said, growth in 2022 is expected to be pretty muted with just 5.6% EBITDA growth, and normalized earnings per share expected to decline by 4.6%.
Wall Street’s Take
From Wall Street analysts, PUBM earns a Strong Buy analyst consensus based on seven Buy ratings, one Hold rating, and zero Sell ratings in the past three months. Additionally, the average PubMatic price target of $54.29 puts the upside potential at 64.3%.
Summary and Conclusions
PubMatic is an innovative business that is growing its top line at a rapid pace. Furthermore, it is solidly profitable, something that young high-growth businesses often struggle with.
Perhaps best of all, its valuation multiples do not look too far fetched and Wall Street analysts are almost unanimously bullish on the stock.
On the other hand, the company expects profitability to flatline in 2022 despite continued strong revenue growth, which implies that the company’s valuation multiples may not be quite as attractive as previously thought.
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Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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