PubMatic, Inc | Consolidated Investment Thesis
PubMatic’s proven track record of expanding its Total Addressable Market, forecasted organic growth of 10+%, and expanding network effect are a lethal combination of attributes rarely found in companies trading at single-digit earnings multiples.
- Cash from Operations/Market Capitalization yield at >12%
- Free Cash Flow/Enterprise Value yield is >10%
- BuyBack Yield TTM 10.57%
Value proposition
PubMatic’s infrastructure platform is empowering a rapidly growing number of publishers and app developers to improve monetization of viewer attention and first-party data:
“Rajeev Goel – Co-Founder and Chief Executive Officer
Yeah, maybe I can just add a quick comment on that. So, it’s true, of course, Matt, that we’re going to have a bit of a headwind with that DSP until middle of next year. But to Steve’s point, you know, we’re getting much more deeply embedded into advertising-driven businesses. You know, the X announcement, the supply path optimization with dentsu with Connect and Activate, you know, Western Union in commerce.We’ve expanded the Roku relationship into CTV marketplaces. So, these are all, I think, good examples of how we’re getting more and more embedded into really large players in the advertising ecosystem. What I’m really excited about is how the pieces are very much overlapping and reinforcing. So, when we engage in supply path optimization, that brings more streamers and publishers and commerce media customers to our platform because they want access to those dollars.
Commerce media partners, they bring more streamers to us because we can overlay the commerce data onto the streaming inventory. And then, commerce and Connect participants, they create more bids for our publishers, which generates more revenue for them. So, I think we’re getting into a really interesting point here where all of these pieces are coming together and reinforcing each other.”
Margin Expansion
Emerging Revenue streams doubled as a percentage of total revenue from 2% to 4% in 3Q’2024. The Emerging Revenue segment is forecasted to have higher gross profit margins and are incremental offerings which can both be an on-ramp for new customers as well as layered into existing customers.
Capital Allocation
PubMatic’s capital allocation is a net positive to long-term returns. They regularly hold >15% of the market cap in net cash, have a low historical rate of M&A, & have ramped up their share buyback cadence which is expected to reach $100M (10% buyback yield) in 2024. This will result in the total diluted share count falling below 49M shares outstanding. This is down more than 4M shares YoY net of SBC.
2025 Expectations based on Q3 commentary:
Total revenue growth will benefit in 2025 from:
- The rapid growth of emerging revenue streams
- New high large partnerships (Roku, Disney+ HotStar, Roblox, & Twitter) scaling up
- Secular growth in advertising spend across Commerce/Retail Media, CTV, Mobile Gaming, & Social Media
PubMatic expects to slow hiring for the remainder of 2024 into 2025 which will expand Operating Income.
Short term headwind
Due to a change in bidding format of a single large DSP (assumes to be DV360) in 2Q’2024, second quarter revenue contribution from this DSP dipped by $5M. Spend from this DSP stabilized in 3Q’24 & their revenue contribution is expected to grow from this lower base moving forward.
Takeaway
I forecast PubMatic to yield investors >20% IRR over the next 10 years.
Q3 Earnings Call Notes:
https://community.fool.com/t/q3-earnings-conference-notes/675908/2?u=colebarcia
Discounted Cash Flow Model:
Full Investment Thesis: