BZFD - Taboola.com: Carving Out A Major Bottom In The Stock With Yahoo!

Summary

• Taboola signed a significant partnership deal with Yahoo! lasting 30 years and adding $1B in projected near-term annual revenue.
• A 25% equity stake for Yahoo! dilutes the equity, but creates a strong incentive to support Taboola's success.
• If the numbers unfold as expected, the market's big response to the deal will hold out as creating a major bottom for Taboola's stock.
• Still, an aggressive 2025 revenue target looks like a close call and will require growth in footprint and engagement at Yahoo!

Even venerable Yahoo! is not yet 30 years old ( founded in 1994 ). In that time, the company has undergone several branding changes, a swirl of product launches and deaths, four different ownership models (from start-up to private equity), and a large number of CEOs. So I was surprised when Yahoo! and content recommendation platform Taboola.com, Ltd ( TBLA ) signed a 30-year partnership deal on November 28, 2022. Almost no one in the industry has done the internet for 30 years, so I imagine this deal will go through changes if it survives this entire time. Surely, the internet and internet advertising will change dramatically over the next 30 years (and zip beyond Taboola's vision of an internet, or "open web", that is feed-based like Meta's Instagram). Yet, for now, this deal stands prominently in an industry where many publishers can hop from one advertising platform to another. Taboola gets exclusive access to a substantial and valuable chunk of inventory. Since TBLA has faded from the initial excitement, I wanted to take a closer look at the go-forward prospects. If nothing else, this deal should carve out a much-needed and sustained bottom for the stock.

BuzzFeed Prelude

Less than two weeks before the Yahoo! partnership, Taboola signed a deal with BuzzFeed and HuffPost (formerly co-existing with Yahoo under Verizon ( VZ )). A main thrust of the deal appears to be incremental monetization, which will allow BuzzFeed ( BZFD ) to remain "free for millions of readers." That explicit goal says a lot about the financial challenges BuzzFeed must be facing. An unimpressed market has sold BZFD for a 41% loss since the news; at the time of writing, BZFD closed at exactly $1/share. TBLA lost ground five straight days in the wake of the deal. Technically, BuzzFeed competes with Yahoo! News even as HuffPost content can be found on Yahoo! News. The incremental value-creation is fuzzy here, and the lack of financial details in the announcement meant analysts had no hook for upward revisions.

The Big Deal With Yahoo!

The initial excitement about the Yahoo! deal was palpable. This news included plenty of financial details. Accordingly, the market had a basis for sending TBLA higher by as much as 78% before settling on a 43% gain.

In a presentation accompanying the announcement , Taboola estimated that this deal would have increased 2022 revenue from $1.396B to $2.454B if signed ahead of the year. This 76% increase in revenue matched the initial surge in TBLA shares. However, the deal also includes a large dilutive component: Taboola gave up 25% of pro forma equity with 16.7% of the voting power. Taboola increased shares outstanding from 253.3M to 337.7M to facilitate the equity part of the deal. So revenue per share in Taboola's hypothetical scenario would have increased 32%. Adjusted EBITDA per share would have increased 43%. In other words, it is very possible the peak of the initial response to partnership news already priced in the near-term potential of the partnership.

Moreover, the extra $1B in revenue is gross dollars before commissions get paid to publishers or the "TAC" (traffic acquisition cost). Taboola did not provide ex-TAC estimates, but it is clear that ex-TAC revenue is far short of $1B. The company explicitly stated that "this partnership is a big step toward achieving our goal of generating $1 billion in ex-TAC by 2025." For 2021 , Taboola reported $518,863 in revenue ex-TAC and for the three quarters to-date in 2022 , Taboola reported $410,774 in revenue ex-TAC. Taboola has some ambitious growth goals to meet in two years' time. As a result, TBLA shares will be very sensitive to news about the actual financial results of the Yahoo! partnership. Note that the market will need patience as Taboola expects "benefits will start materializing gradually for Taboola in H2 2023 and continue in 2024." Looks like a close call for the 2025 $1B ex-TAC target.

Competition

Competition is a major wildcard for Taboola. Never mind 30 years, in the here and now, Taboola is fighting with the big tech companies for advertising dollars on the "open web" as Taboola puts it. I spent less than one minute clicking around publishers looking for competitors with Taboola's same or similar business model, using content recommendations to encourage paid clicks. I found Revcontent. In 2020, Revcontent paid over $500M to publishers ('TAC') which means the private company operates at a scale similar to Taboola. Taboola announced at its March 2021 Analyst Day presentation that it paid $2B over the past three years to publishers. Taboola will be highly dependent on Yahoo! growing its footprint and engagement to achieve the 2025 goal.

Outbrain ( OB ) is Taboola's publicly traded competition, currently trading at about a third of the market cap of Taboola. The two companies are so similar that they launched merger talks over 3 years ago, but they failed to reach an agreement after a year of negotiations . Now, locked out of the potential to do business with Yahoo's 900M users, Outbrain's long-suffering stock dropped 9.9% on the Taboola news. OB has yet to recover and even hit a new all-time low along the way.

The Trade

TBLA came to market last year through a SPAC valued at $2.6B. TBLA's market cap at the time of writing is $702M . So even before the Yahoo! deal, the market valued Taboola at a fraction of its revenue. Thus, it is very tempting to conclude TBLA is severely undervalued. Yet, with a potential recession looming in 2023, I find it difficult to pull the trigger here. I DO expect that the Yahoo! deal put a sustainable floor under Taboola's stock both for the revenue opportunity as well as the potential for some M&A activity which takes TBLA out at higher levels in some future scenario (before the 30 years run out on this deal of course). Thus, all else being equal, I anticipate I will buy TBLA shares as the clock ticks closer to the company demonstrating material progress with its Yahoo! opportunity.

Epilogue: The Chumbox

While the headline numbers look enticing, a big question for Taboola (and its direct competitors) is the long-term viability of the content recommendation business model. These ads that typically appear at the end of content are the subject of so much derision that the ads are dubbed the " chumbox ," a metaphor for clickbait, referring to meat-based bait used by fishers out in the open waters. Taboola is working hard to legitimize the ads as an alternative way for users to interact with content. Taboola sends information to users, whereas Google sends users to information. Taboola calls it "search in reverse" where the internet goes "from people looking for information to information looking for people." Think of the difference as push (content recommendation) versus pull (organic search). An algorithm uses the context of the content in-view to infer the next best content for the user to read. The company's aspiration to expand into recommendations for video games, apps, podcasts, TV shows, and local news further positions the company in direct, head-to-head competition with the big tech companies who already build and rely upon robust recommendation engines.

Taboola champions content recommendation as a privacy-safe method of advertising. It does not require cookies, just an understanding of the content. If the content is truly indicative of a user's interest, then that user will find the content recommendations relevant. However, it is extremely difficult to get users to consume more content (have you clicked on any of the links in this article which provide source information?). Even clever titles and eye-catching imagery may not cut through the noise of the numerous ads vying for attention, especially if a user's curiosity is already satisfied. When that content is really a sponsored article (like content marketing), users can stumble upon a sales pitch using content to sell instead of informing. Fortunately, publishers also use these ads to surface more of their own content, thus giving the technique a shield of legitimacy. As of a year ago, Taboola reported that half the clicks on its ads go to the site's own content.

So a bet on Taboola is a bet that the content recommendation industry will survive and that the company succeeds in repositioning its ads in a user-friendly way of engaging with the open web. The Yahoo! deal provides a fresh pivot point to study for clues. If TBLA somehow manages to trade down to fresh all-time lows, the market itself will flag lingering skepticism about future growth.

Be careful out there!

For further details see: