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PubMatic: Strong Fundamentals but a Lofty Price
Stock Analysis & Ideas

PubMatic: Strong Fundamentals but a Lofty Price

PubMatic Inc (PUBM) is engaged in the digital advertising business. The company provides a specialized cloud infrastructure platform that enables real-time programmatic advertising transactions.

The platform helps independent app developers and publishers to control and maximize their digital advertising businesses. The company was founded in 2006 and is headquartered in Redwood City, California.

PubMatic made its trading debut on the Nasdaq in December 2020 at an IPO price of $20 per share, raising about $115 million. I am bearish on PUBM stock primarily because of valuation concerns. The company has strong fundamentals, but the stock price appears to be trading at a large premium now. Check the latest Top Analyst Stocks for other investment ideas.

PubMatic Business News

PubMatic, in its investor presentation dated November 2021, presented interesting insights about its business model and its vision that “fuels the endless potential of internet content creators.”

I am not sure whether the company’s belief that all advertising will become digital and that all digital advertising will become programmatic will become a reality. Programmatic advertising uses algorithmic software and advanced technology that helps marketers and advertisers to automate their digital ad campaigns.

There are several advantages to programmatic advertising, such as the higher reach of the audience for advertisers at more affordable prices, better transparency, relevancy, and real-time reporting. The advertising business is evolving rapidly, and trends in marketing change at lightning speeds. Competition in online advertising is very intense.

The specialized cloud infrastructure of PubMatic for digital advertising is operating in the U.S., European and Asian markets, delivering 259 billion ad impressions per day, and about 1.1 trillion advertiser bids per day, as per the latest data for the end of September 2021.

The company has leading publishers as customers and considers important financial key drivers to be a scaled global business, a usage-based business model, high gross margins, a highly efficient business model, and consistent cash flow generation.

The reported 54% year-over-year growth for revenue and 117% for net income are very positive, proving that traction is present. The net dollar-based retention, a key metric measuring a company’s year-over-year performance related to annual recurring revenue, increased from 110% (TTM Q3 2020) to 157% (TTM Q3 2021).

Q3 2021 Financial Results: Record Revenue

PUBM stock earnings have been positive as of Q4 2020 but are highly volatile.

The Q3 2021 financial results were strong. “We delivered record revenue in the third quarter, well ahead of our expectations. This quarter marks our fourth consecutive quarter of organic revenue growth above 50% and adjusted EBITDA margin over 30%,” said Rajeev Goel, co-founder and CEO at PubMatic.

Most notable financial highlights on a year-over-year comparison were revenue of $58.1 million, an increase of 54%, GAAP net income of $13.5 million, or $0.24 per diluted share, an increase over net income of $6.2 million, or $0.10 per diluted share, and total cash, cash equivalents, and marketable securities of $136.7 million with no debt, an increase of 12% from the second quarter of 2021.

Fundamentals: Very Strong Financials

 I like the fundamentals of PUBM stock as they are very strong, with no debt, strong net income growth, and positive free cash flows.

However, we need to consider two major negative factors other than valuation. The first is the growing figure of days sales outstanding which may cause cash flow problems.

The second is the significant dilution of shares. Diluted weighted-average shares for Q3 2020 were 15,876,890, while for Q3 2021, it was 56,498,891. In addition, operating costs are rising fast, yet another reason of concern.

Valuation: Trading at a Large Premium

PUBM stock is relatively overvalued based on its P/E ratio of 52.3x compared to the U.S. Media industry average of 12.8x.

Wall Street’s Take

PubMatic has a Strong Buy consensus rating, based on seven Buys and one Hold assigned in the past three months. The average PubMatic price target of $54.29 implies 57.4% upside potential.

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Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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