TRMR - Tremor International: Weakening Economy Will Likely Remain A Headwind Throughout 2023

Summary

• With high interest rates triggering the plunge in tech stocks, TRMR participated in the decline, and has yet to recover from its collapse since its June 2021 IPO.
• Not only has Tremor been hit hard from its ill-timed IPO, it is now facing the ramifications of a recession, which would hit its ad business hard.
• Even so, when interest rates finally level off and fall, and economic growth returns, it could be a solid long-term holding generating sustainable returns.
• But that time hasn't come yet, and it faces a higher interest rate environment and weakening economy that will probably remain headwinds throughout 2023, and maybe longer.

Tremor International ( TRMR ) is a company that offers an end-to-end video advertising service that combines a DSP (demand-side platform), SSP (supply side platform), and DMP (data management platform), into a one-stop shop platform for advertising buyers and sellers.

Since its IPO on the Nasdaq in June 2021, Tremor has failed to impress investors, as the stock, after briefly climbing to approximately $24.00 per share on July 26, 2021, has been in a steady downward spiral, culminating in a 52-week low of $6.12 per share on December 27, 2022.

Among its largest competitors are the huge players like Google (GOOG) (GOOGL) and Facebook (FB), which offer similar advertising platforms as TRMR does, and others like Magnite (MGNI), which it the largest standalone SSP in the world, and The Trade Desk (TTD), which is the largest standalone DSP. Other competitors offering end-to-end ad platforms are Outbrain (OB), Perion (PERI), and Taboola (TBLA).

Not only does TRMR face formidable competition, but it is also currently operating in unfavorable market conditions for tech and ad companies, with interest rates expected to continue to rise and the economy to weaken going forward.

In this article we'll look at a few of its most recent numbers, its trending sales, the impact of its acquisitions on the company, and most important, why the interest rate and macroeconomic environment pose significant headwinds to the company over the next year.

Some of the numbers

Revenue in the third quarter was $70.9 million, down 18.5 percent year-over-year. For the first nine months of 2022 the company generated revenue of $206.7 million, compared to $213.4 million in the first nine months of 2021. Since the nine-month results included 18 days from its acquisition of Amobee, organic revenue was down more than it appears in comparison to the prior year.

CTV was the largest contributor to revenue, accounting for 87 percent of total revenue in the third quarter of 2022, and 81 percent of total revenue for the first nine months of 2022.

Adjusted EBITDA in the reporting period was $30.1 million, compared to $42.3 million in the third quarter of 2021. In the first nine months of 2022 the company generated adjusted EBITDA of $102.9 million.

Adjusted EBITDA margin in the third quarter of 2022 was 43 percent on a reported revenue basis and 46 percent on a net revenue basis.

The biggest takeaway from the numbers and management commentary is macroeconomic challenges are resulting in a declining "advertising demand across several verticals and formats."

While the company said it was seeing potential evidence of recovering advertising demand in the fourth quarter, I don't think it's sustainable in light of the economic environment the company is now operating in.

Macroeconomic conditions

TRMR is taking a double hit concerning headwinds, as it's not only a tech company experiencing the effects of higher interest rates that are driving down its share price, but also weakening economic conditions that are already showing signs of slowing down its ad business, and if things get worse economically, advertising sellers and buyers are going to continue to lower spend.

I don't see how the company is going to be able to avoid the impact of these trends unless the recession is a softer-than-expected one that doesn't have the level of historical impact on advertising than they normally have.

With that in mind, I think things are going to get worse before they get better, even if there's temporary boost in its share price related to its next earnings report, which will include a full quarter of performance from Amobee.

While the company has been growing via acquisitions over the last several years, with significant contributions to the top and bottom lines, it's my opinion that the macroeconomic headwinds are going to suppress the potential of those assets until the Fed stops raising interest rates and the effect of the recession if behind us.

Acquisitions

Tremor has had a series of acquisitions or investments in companies since 2019, starting with YuMe assets in 2019; Unruly in 2020; Spearad in 2021; and an investment in VIDAA and acquisition of Amobee in 2022.

Starting with the acquisition of YuMe, and including the acquisitions above, the company went from generating revenue of $164 million annually to a projected $460 million in 2023.

Contributions from the acquisition of YuMe and on resulted in an increase in adjusted EBITDA from $60.4 million in 2019 to an estimated $180 million in 2023.

I think the way to look at this under the current economic environment is this the value of the contributions, along with an eventual return to organic growth, isn't going to be unlocked until there is confirmation the economic is sustainably turning around.

Conclusion

TRMR is competing in a sector that has two strikes against it in the current macroeconomic conditions, including high interest rates which put significant downward pressure on tech stocks, and weak economic conditions, which always put downward pressure on those competing in the ad industry because of companies cutting back on spending.

Even though the company is trading at a low valuation, if the economy continues to get worse while the Federal Reserve continues to raise interest rates, it is almost certainly going to fall a lot lower than it currently is trading in my opinion, which would provide an excellent entry point for those willing to patiently wait for what I believe are going to be excellent returns over the long haul.

But in the near term, I think the stock has the potential to fall below its 52-week low, and that is the time I think those interested in TRMR should seriously consider taking or adding to an existing position.

For now, I think the best thing to do is to wait. I see little that would push the share price of the company sustainably up, and under current conditions, there's a much higher percentage chance the stock is going to drop further before it finally finds a bottom.

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