TBLA - Taboola Progresses With Yahoo And Ups Guidance

2023-12-15 10:44:28 ET

Summary

• Taboola.com Ltd. provides online marketing and advertising recommendations for website publishers and advertisers worldwide.
• The company raised its forward earnings and cash flow expectations on improved visibility into its cost containment outlook.
• While there are risks, particularly from its business in Israel, my outlook on Taboola.com Ltd. is a cautious Buy at around $3.80 per share.

A Quick Take On Taboola

Taboola.com Ltd. ( TBLA ) provides online marketing and advertising recommendations for website publishers and advertisers worldwide.

The company raised its forward earnings and cash flow expectations on greater visibility into its cost containment outlook.

While there are risks, especially from its business in Israel, my outlook on Taboola.com Ltd. stock is a cautious Buy at around $3.80 per share.

Taboola Overview And Market

New York-based Taboola.com Ltd. was founded in 2006 to operate an online network and recommendations system connecting advertisers with suitable websites and publishers.

The firm is headed by founder and CEO Adam Singolda, who is also a co-founder of K Health and a Mentor in TechStars, an incubator for technology-oriented startups.

The company says it serves 500 million daily active users, and has 9,000 publishers and over 15,000 advertisers.

TBLA acquires customers through its self-serve portal and through a dedicated sales and marketing team that works with larger accounts.

According to a 2021 market research report by Transparency Market Research, the market for digital ad spending is estimated to reach $1.4 trillion in 2031.

If achieved, this would represent a CAGR (Compound Annual Growth Rate) of approximately 14% from 2021 to 2031.

The primary reason for this forecasted growth is shifting consumer preferences toward consumption of social media and digital video, increasing the demand for display advertising.

Additionally, after the pandemic, travel, hospitality and automotive industries have represented significant demand growth opportunities, although the three industries are trending toward their pre-pandemic level of activities.

Major competitive or other industry participants include:

• Outbrain

• Facebook

• Google

• LinkedIn

• X

• Amazon

• Criteo

• Magnite

• PubMatic

• Xandr.

Taboola’s Recent Financial Trends

Total revenue by quarter (blue columns) has produced uneven results due to headwinds in the advertising industry; Operating income by quarter (red line) has remained negative in recent quarters:

Gross profit margin by quarter (green line) has trended lower; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have varied with no discernible trend in recent quarters.

Earnings per share (Diluted) have been highly volatile in recent quarters:

(All data in the above charts is GAAP.)

In the past 12 months, TBLA’s stock price has risen 44.51% vs. that of Outbrain Inc.’s ( OB ) gain of 22.79%:

For balance sheet results, the firm ended the quarter with $250.7 million in cash, equivalents and short-term investment and $194.8 million in total debt, of which $53.0 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $55.3 million, during which capital expenditures were $26.3 million. The company paid $64.8 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Taboola

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, using a discount rate of 10% (10-year Treasury (US10Y) at 4% plus 6% equity risk premium) and forward earnings per share assumption of $0.37 and an 8% growth rate for the next ten years, the firm’s shares would be valued at approximately $5.64 versus the current price of $3.83, indicating they are potentially currently undervalued.

TBLA’s most recent unadjusted Rule of 40 calculation was negative (8.4%) as of Q3 2023’s results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Taboola

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted raising the midpoint of its full-year 2023 guidance for adjusted EBITDA and non-GAAP net income.

Trailing twelve-month free cash flow was $55 million, or 3x versus the prior period, and management expects over $100 million in free cash flow for 2024.

The company sees itself as the leading "open web" must-buy ad platform, as Google (GOOG) is for search and Meta Platforms (META) is for social.

Management believes its investments in improving yield, or its ability to monetize its interaction with readers, will provide the opportunity to double or triple its current revenue, though they didn’t say on what timeframe.

I prepared a chart showing the frequency of a variety of keywords and terms used by management and analysts:

The chart indicates the company is facing certain headwinds, part of which is that 10% of its business comes from Israel, which is facing substantial economic disruption from the October 7 Hamas attacks and subsequent ongoing war.

Analysts questioned the leadership about forward guidance and its Yahoo integration/migrations progress.

Management said that it wants to be conservative with guidance on the revenue side but raised guidance due to higher confidence on the cost-containment side.

With the 30-year Yahoo strategic relationship, the company announced in October that its advertiser clients could run native advertising on Yahoo’s digital properties in more than a dozen markets globally.

The firm has completed its hiring to support the transition, and management is encouraged by early advertiser successes.

For the quarter’s results, total revenue rose 8.3% YoY, while gross profit slid by 0.3%.

Selling and G&A expenses as a percentage of revenue fell by 2.7% year-over-year, and operating losses increased by 5.1% to $18.7 million for the quarter.

The company's financial position is strong, with ample liquidity, some long-term debt, and strong free cash flow.

Looking ahead, 2024 revenue is currently estimated by analysts to suggest growth of 4.2% over 2022.

If achieved, this would represent an increase in the revenue growth rate versus 2022’s growth rate of 1.6% over 2021.

A potential upside catalyst to the stock could include growth of advertising on the Yahoo network of sites and continued yield improvement.

A possible downside to revenue would be from the ongoing conflict in Israel and Gaza or if the conflict widened to the north of Israel.

Given these potentials, my discounted valuation of Taboola.com Ltd. indicates the stock may be a bargain given modest growth and earnings, so my near-term outlook is a cautious Buy at around $3.80 per share.

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