Let’s take a moment to look at ad-tech. This is the merger of advertising and digital technology, and it’s become increasingly prevalent in our online age. Ad-tech underlies the success stories behind many of the market’s biggest companies, including giants like Google and Facebook, as well as online streaming services.
But wait, you say, all of these companies are down in recent months – and that’s true. A generally deteriorating economic situation has pushed back hard on them, and ad-tech stands at the center of that storm.
Much of the digital world makes its money on the back of advertising, and as inflation has gained steam and consumers have pulled back on their spending, the advertisers have faced an increasingly difficult environment. The result – lower ad spends, less customer engagement, fewer clicks, less revenue all around. It’s a dangerous cycle, and one that will not be easy to break.
And yet, ad-tech remains alluring for investors. No matter the headwinds, it’s clearly here to stay; so much of our lives are conducted online that we cannot easily divest of it – which means that ad tech will grow. According to some estimates, the sector, which was worth $20 billion in 2021, will hit $42 billion by 2027.
No matter what the economic conditions, growth of this magnitude will bring opportunities. It might not come easy, and it might not come to everyone, but the openings will come. That’s the underlying fact behind RBC analyst Matthew Swanson’s look at the ad-tech market, when he writes, “As we head into 2023, we looked through forecasts and deeper into macro indicators as well as a 500-person consumer survey to get a better sense of the relative momentum in the current macro environment. After this analysis, in 2023 we don’t expect to see the rising tide that lifted all ships in 2021, nor do we expect to see the unexpected demand headwinds that created challenges for all companies in 2022. The uneven environment in 2023 should create opportunities for companies to show differentiation…”
Now we’ll follow Swanson’s lead and take a look at two of the ad-tech stocks which he has recommended. According to the TipRanks data, these are both Buy-rated, with substantial upside potential. Here are the details, along with some of Swanson’s comments.
Magnite (MGNI)
We’ll start with Magnite, a sell-side ad-tech platform that bills itself, with some reason, as the world’s largest independent company in that niche. Magnite boasts a $1.4 billion market cap and saw over $468 million in total revenues last year. The company’s platform allows online publishers worldwide to sell digital advertising across the full range of channels and formats, including CTV, audio, desktop, and mobile. In the difficult marketing environment of 2022, the company did see a 40% drop in share value– but that was partly mitigated by a solid 65% jump at the beginning of November.
The jump came when the company released its 3Q22 earnings numbers, which beat the forecasts, while the company reported sound guidance for Q4. At the top line, the company delivered $145.8 million in revenues, for an 11% year-over-year gain. At the bottom line, Magnite had a non-GAAP EPS of 18 cents, beating both the forecast and the year-ago number (14 cents each) by 28%.
On guidance, the company published expectations for full-year 2022 ex-TAC revenue above $510 million, and for full-year free cash flow in excess of $105 million. We should note here that Magnite shows a consistent pattern of rising financial metrics through the calendar year, from the low point in Q1 to the high point in Q4; keeping to that pattern will allow the company to easily meet its published full-year guidance numbers.
Assessing the Q3 print and looking ahead, RBC’s Swanson highlights the robust showing and the positive noises made by the company even when faced with the difficult macro conditions.
“Magnite delivered strong results particularly given the macro backdrop as they look to build consistency with improving DV+ results and secular tailwinds around CTV,” the analyst said. “In a challenging macro, management remains bullish on the secular growth of its CTV business which grew 29% y/y vs. +19% q/q, now represents 44% of total revenue ex-TAC. Management feels well positioned to benefit from the influx of AVOD CTV inventory in 2023 noting new partnerships with Fox, Vizio and Kroger as well as expanded partnerships with LG, Disney and GroupM.”
In line with these comments, Swanson goes on to rate the stock as Outperform (or Buy), and his price target, set at $15, implies a gain of 42% in the months ahead. (To watch Swanson’s track record, click here.)
The 4 recent analyst reviews on Magnite shares include 3 to Buy against 1 Hold, for a Strong Buy consensus rating. The stock has a $13.75 average price target and a $10.59 current trading price, for an average upside potential of 30% by the end of 2023. (See Magnite’s stock forecast at TipRanks.)
PubMatic (PUBM)
Next on our list is PubMatic, another independent sell-side ad-tech firm. PubMatic works with both online content creators and digital advertisers, offering purpose-built tools to connect automated ad systems with mobile apps, websites, and video platforms. The company can claim some impressive statistics, with its platform generating 491 billion ad impressions, 1.5 trillion advertiser bids, and 6.9 petabytes of processed data every day.
PubMatic’s last reported quarter was 3Q22 – and the results were mixed. The company showed 45% y/y growth in omnichannel video, which helped power an 11% y/y gain in total revenue – to $64.5 million, falling short of the consensus estimate by $2.49 million.
The GAAP net income came in at $3.3 million, indicating a 5% margin, and the company generated $28.1 million in cash from operations. At the bottom line, the company’s net income translated into a GAAP EPS of $0.06, down 75% y/y whilst missing the Street’s forecast – an unusual occurrence, as Pubmatic has made a habit of consistently beating EPS expectations. EPS was down in non-GAAP measures as well, from 30 cents per diluted share in 3Q21 to 22 cents in 3Q22, although that figure came in 2 cents above the analysts’ forecast.
PubMatic is well-positioned to cope with falling earnings, however, as the company reported finishing 3Q22 with no debt and $166.1 million in cash and liquid assets on hand.
We can check in with RBC’s Matthew Swanson again, who reminds investors of the tailwinds pushing Pubmatic ahead: “Key drivers include: 1) SPO (supply path optimization), which has a large pipeline and accounted for 30%+ of total activity in Q3 vs. 10% beginning of 2020, as management focuses on integrating Martin onto the platform; 2) CTV, +150% y/y as programmatic will likely accelerate in a challenging macro; 3) addressability which remains a key focus with secular trends around cookie-loss and consumer privacy; and 4) retail media which management views as a natural expansion of its platform, building out its product and GTM motion.”
In Swanson’s view, this set-up justifies an Outperform (Buy) rating on the shares, while he also gives the stock a $24 price target to suggest a one-year upside potential of 87%. (To watch Swanson’s track record, click here.)
Overall, this stock’s 7 recent analyst reviews, with their breakdown to 5 Buys and 2 Holds, support a Moderate Buy consensus rating. The shares are priced at $12.81 and have an average target of $19.71, implying a 54% potential gain this year. (See PubMatic’s stock forecast at TipRanks.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
