I’ve again owned a smallish position in Pubmatic since last month, after buying and then selling a couple months ago. So this is my second time owning the share.
I’ve decided to test all of my stocks individually against some fundamental criteria, starting with Pubmatic.
This really stuck with me from Saul’s recent posts: “We buy special high growth stocks which we hope can at least triple.”
I therefore decided to make that the key question that I will try to answer about Pubmatic:
Do I think the company is special and its stock price can at least triple in the next two to three years?
To answer this question I will take Bear’s advice and use Saul’s key considerations and add a couple of others as well.
What do they do?
Pubmatic is a supply-side advertising platform. They are the estate agents of the digital advertising world. Pubmatic is on the other side of the likes of the Trade Desk, who is (mainly) a demand side platform, the buyers of the ads. They sell ad inventory on behalf of their large media owner customers or publishers - they employ proprietary real-time tech to sell their customers’ available online advertising slots for them, and take a small cut of every ad sold. They compete with Google who is the gorilla in this space and the likes of Magnite.
Rapid revenue growth
Rev Q1 Q2 Q3 Q4
2019 23.6 27.4 28.5 34.4 -> FY:113.9
2020 28.3 26.4 37.8 56.2 -> FY:148.7 **up 30%**
2021 43.6 49.6 58.1 82.1e -> FY(e):233.5 **up 57%**
QoQ Q1 Q2 Q3 Q4
2019 16% 4% 21%
2020 -18% -7% 43% 49%
2021 **-22% 14% 17% 41e%**
YoY Q1 Q2 Q3 Q4
2020 20% -4% 33% 63%
2021 **54% 88% 54% 46e%**
→ This looks like rapid, and accelerating revenue growth, albeit seasonal and COVID-impacted. They guided for $76m/35% yoy/31% qoq for Q4. Assuming an 8% beat (in the last two quarters they beat by 8% and 9.6%) Q4 will be $82.1m, up 46% yoy off a very big Q4 of last year, which was inflated by political ad spending.
Strong customer growth
Customer growth - number of publishers - in the last years has been good - above 40% yoy and include News Corp, Verizon Media
In the last several quarters it looks like customer growth has slowed, but the business is seasonal, so I will reserve judgment until they publish Q4 before concluding on that:
Number of publishers
2018: 571
2019: 840 (up 47%)
2020: 1200 (up 43%)
Q1 Q2 Q3 Q4
2020 1100 1200
2021 1250 1300 1370
→ So customer adoption and growth - the land part of a revenue growth flywheel - is doing well.
Special niche, with something special ; a moat and/or big future
They are a challenger supply-side advertising platform competing with leader Google with their own specialised cloud infrastructure for digital ads and a transparant usage-based business model. They focus on the larger publishers in the world which they believe are under-served. Some key quotes from their SEC filings:
By harnessing our massive data asset and leveraging our sophisticated machine learning algorithms, we increase publisher revenue
We are aligned with our publisher and app developer partners by being independent. We do not own media and therefore do not have a vested interest in driving ad revenue to specific media properties.
We own and operate our own software and hardware infrastructure around the world, which saves significant costs as compared to companies that rely on public cloud alternatives, partly due to the data-intensive nature of digital advertising.
As we have extended our cloud infrastructure to service an increasing number of ad formats and devices, we have expanded our profit margins and maintained our capital efficiency that is among best-in-class for similar publicly-traded technology companies.
I would venture that they do serve a special niche. They focus on the largest media publishers and serve them well and independently, they have their own proprietary tech, infrastructure, data and ML models, and their significant tech and headcount presence in Pune, India gives them a cost advantage.
Recurrent revenue
I would argue that most of their revenue is recurrent, although not subscription-based. They make a cut of every ad that they serve. And barring a complete shut-down of advertising spend, ads will continue to be served as long as they retain their publisher contracts, which renew automatically every year.
“We generate revenue from publishers primarily through revenue share agreements, generally one-year contracts that renew automatically for successive one-year periods, unless terminated prior to renewal.”
In the depth of the COVID-scare of Q2 2020, their revenue was almost the same as it was a year earlier: $26.4m vs $27.4m in 2019. Sure, it was down vs the previous quarter, but revenue did not fall off a cliff, and recovered very quickly thereafter.
Not capital intensive
They invest in their own infrastructure as a source of differentiation, similar to Cloudflare and other top companies we follow. Capex as a % of revenue is relatively modest at around 13% of revenue, so this is not a capital intensive company.
High gross margins
GP% Q1 Q2 Q3 Q4
2019 63% 69% 66% 73%
2020 65% 65% 72% 80%
2021 72% 74% 72%
72% in Q3, and on an upward path. Q4 has historically been higher so expecting an uptick in the next reported quarter. So gross margins in the high 70%’s - good for me.
Rapidly improving metrics
The company is already net profit positive, so I’m going to focus on EBITDA and operating cash flow.
Adj EBITDA%
% Q1 Q2 Q3 Q4
2019 **2% 20% 28% 27%**
2020 18% 19% 35% 48%
2021 **33% 37% 42%**
Last Q1 to Q3 of 2021:
33% → 38% → 42%
Last 3 years’ Q3s (to take into account seasonality):
2019: 28%
2020: 35%
2021: 42%
→ Clearly a very impressive improving EBITDA trend.
Operating CF%
Op CF% Q1 Q2 Q3 Q4
2019 14% 38% 31% 36%
2020 52% -10% 10% 15%
2021 29% 42% 45%
→ Same thing on cash flow: rapidly improving.
Dollar-based retention rate >120%
NRR% Q1 Q2 Q3 Q4
2019 109% 109%
2020 112% 107% 110% 122%
2021 **130% 150% 157%**
Last 4 years’ NRR for Q3:
2018: 71%
2019: 109%
2020: 110%
2021: 157%
Something fundamental happened in 2018. This is what they had to say about 2018 in their filings:
“Our 2018 net dollar-based retention rate reflected our proactive efforts to improve the quality of our available impressions by removing ad impressions and publishers who did not meet the emerging industry standards for ad inventory quality.”
So they seem to have had poor quality publishers and buyers who were degrading the overall exchange and they successfully set about to change that. All good.
→ NRR is currently on steroids, clearly impacted by COVID. Nevertheless, even if it was to decrease to the range of >130% that the CEO indicated as a more normal level, they have a high NRR.
Good Net Promoter score
From Pubmatic’s website https://pubmatic.com/blog/pubmatic-top-ssp-outside-walled-ga…
“In November 2018, The Advertiser Perceptions survey asked respondents about their likelihood to recommend each SSP, which is used to determine a company’s Net Promoter Score® (NPS) (a proxy to measure the loyalty of a company’s customer relationships). PubMatic received the number two score among all SSPs, trailing only Google Ad Manager.”
→ So back in 2018, Pubmatic seems to have received a very positive NPS, which seems to have then helped with their recent successes. While I couldn’t find any more recent survey, this is good enough for me, especially given that since then, Magnite, arguably the one they need to beat, has been focused on (and probably remain focused on) other things, like integrating the various disparate businesses which were acquired to form Magnite.
Lots of cash and not a lot of debt
End Sept 2021: $136m cash on hand and no long-term debt of note. In additon they are cash flow and net profit positive, so no issues here.
Founder led
The CEO and co-founder is Rajeev Goel https://www.linkedin.com/in/rajeevgoel1/ . He’s the son of Indian immigrants, a 42-year old computer science major who founded the company in 2007 with two other computer scientists - his brother Amer who is the Chief Innovations Officer and Mukul Kumar, who is responsible for engineering, based in India. So a great leadership team who has been in it from the start.
I listened to this video and really like the CEO. https://www.youtube.com/watch?v=q9WPVdbz1Hk
I especially liked his focus on profitability, return on invested capital, discipline and efficiency. At around 23:40 he says:
“We’re pretty unique in terms of our capital efficiency and return on invested capital. So for instance when last was the time you saw a technology business that’s profitable, had raised less than $75m in total capital, and went public?”
And:
Profit is the best source of capital in my opinion.
→ Very strong on this score.
Don’t have huge customer concentrations
They do have one big customer - Verizon Media Group, with whom they first signed an annual auto-renewing contract in 2015. On the plus side the relative size is steadily decreasing and has halved in the last two years. They derived the following % of revenue from a single customer in:
FY2018: 30%
FY2019: 28%
FY2020: 20%
This has further decreased in 2021:
Q1: 20% → Q2: 17% → Q3: 17%
→ Although not ideal, this is acceptable to me, due to the decrease in relative concentration over time.
OTHER CONSIDERATIONS
Attractive PS ratio
Approximately Q3 2021 10x run-rate revenue, so some may say this is cheap for this level of growth. Others may say ignore it.
Huge TAM / long term opportunity
The global advertising market is huge and undergoing rapid changes currently. From their filings:
Global advertising (digital and traditional) spending was approximately $614 billion in 2020 and is expected to grow to approximately $846 billion in 2024, according to eMarketer. As advertisers follow audiences online, digital advertising is expected to outpace growth of the overall advertising market. According to eMarketer, global digital ad spend is expected to be approximately $395 billion in 2021 and is expected to grow at a more than 10% rate annually over the next three years.
Small Mkt Cap
Approximately $2bn. Can it get to $6bn?
Competition
They need to win against Google and Magnite (among others). Google is the incumbent and a behemoth, so I won’t focus too much on them. And Magnite is run by a professional CEO - Michael Barret, 57, who is a seasoned media man but no computer scientist. Barret was brought in from the outside in 2017 to run Rubicon Project, who then went on to acquire a bunch of other companies and is still busy integrating them to be Magnite. Google Q3 ad revenue was up 44% to a mammoth $53bn!!, Magnite Q3 revenue was up 26% (proforma, i.e. as if it was one company in the comparative period) to $121m and Pubmatic was up 54% to $58.1m, outpacing the other two but off a much much smaller base.
Would love to hear what mekong has to say about the relative competitive position, but it certainly seems to me like Pubmatic is growing faster than the incumbent Google or the big challenger Magnite and could have some more acceleration in store.
CONCLUSION
Do I think the company is special and its stock price can at least triple in the next two to three years?
Yes, I think so. Would love to hear others’ views!
-WSM (Long ±6% PUBM)
