2023-06-20 09:40:11 ET
Summary
- PubMatic is a supply side adtech company which is trying to capitalize on the changes wrought by privacy regulations.
- The company aims on capturing market share as the industry consolidates, and in particular is focused on CTV. In terms of scale, PubMatic trails Magnite, placing it at a disadvantage.
- PubMatic's valuation is modest, but adtech is competitive and has a history of rapid change.
PubMatic ( PUBM ) is an adtech company that is positioning itself to capitalize on industry changes brought about by an increased focus on privacy and a weak macro environment. By focusing on data, scale, Supply Path Optimization (SPO), and omnichannel presence, PubMatic aims to capture market share and drive improved financial performance going forward. Although facing current market headwinds, CTV and digital advertising more broadly remain large opportunities. PUBM stock's valuation is modest given this opportunity, but there remain questions around the strength of supply side businesses, and PubMatic's lack of scale relative to Magnite ( MGNI ).
Market
A weak macro environment and a greater focus on privacy is reshaping the adtech landscape. PubMatic is trying to position itself to benefit from this through a focus on data, scale, Supply Path Optimization and an omnichannel presence.
Figure 1: PubMatic's Position in the Digital Advertising Ecosystem (source: PubMatic)
SPO is probably the most important trend in the industry at the moment for SSPs as it is contributing to consolidation. The introduction of header bidding enabled publishers to offer their inventory to multiple demand sources simultaneously, increasing competition and creating fairer pricing, but also introducing supply chain complexity. SPO refers to creating a more direct path from buyers to sellers, with less fees and greater transparency. SPO is creating a more efficient supply chain and forcing some players out of the market, which PubMatic believes will be beneficial for globally scaled players like itself.
Figure 2: Impact of Header Bidding (source: PubMatic)
PubMatic believes that the open internet is another tailwind for its business. Antitrust activities could force more dominant players, like Google ( GOOG ), to take a more open approach to the market. In addition, smaller players are being forced to open up to outside sources of demand in order to maximize the value of their inventory. Overall, this should provide PubMatic with access to more publisher inventory and increase the size of its addressable market.
Advertising spend is expected to continue shifting online, with digital advertising becoming more programmatic over time. This should lead to solid growth for the digital advertising market as a whole, particularly within the mobile and video sub-segments. The omnichannel video market is expected to be worth 215 billion USD in 2023. CTV is a subset of this market and is expected to be worth 65 billion USD this year.
Figure 3: Projected Digital Ad Spend Growth (source: PubMatic)
Retail media is another potential growth area for PubMatic, driven in part by a need for privacy safe data and attribution solutions. It is unclear how this opportunity will evolve though, as most adtech players are trying to capitalize on this opportunity, and retailers control the data, placing them in a position of strength.
Figure 4: Retail Media Ad Opportunity (source: PubMatic)
The digital ad market has faced headwinds recently, with the fourth quarter of 2022 being particularly difficult. In December, PubMatic witnessed the largest sequential drop in activity from November in the last 10 years. Unsurprisingly, the display business has been the most heavily impacted as advertisers have chosen to focus on performance advertising.
Impressions were up YoY across channels in the first quarter of 2023, however this was more than offset by lower CPMs. Activity increased sequentially throughout the first quarter, but PubMatic believes that it is too early to say whether the market has bottomed. April revenue was roughly flat YoY, so there doesn't appear to be any meaningful improvement in the market yet.
Current market headwinds are also contributing to consolidation in the industry, with both advertisers and publishers looking to squeeze costs out of the supply chain. Longer term this could prove to be beneficial for larger players like Magnite and PubMatic.
PubMatic
PubMatic believes that in the future digital advertising supply chains will be:
- Transparent
- Efficient
- Effective
- Privacy-compliant
To position itself for this future, PubMatic has been focused on SPO, driving scale and creating privacy-compliant data solutions.
Figure 5: PubMatic's Value Proposition (source: PubMatic)
PubMatic believes that offering a range of solutions which are embedded in customer workflows makes the platform sticky. The company continues to expand its footprint across channels and introduce new products in support of this.
Figure 6: PubMatic Growth Drivers (source: PubMatic)
OpenWrap is PubMatic's Prebid-based wrapper solution, which was originally launched in 2016. OpenWrap is a header bidding solution that helps publishers optimize the programmatic advertising process. OpenWrap now covers all leading channels and formats including CTV, mobile app, and web, as well as video, display, and native. PubMatic has seen increased demand for OpenWrap in recent quarters, which the company believes is due to publishers abandoning in-house Prebid wrappers and competing solutions. OpenWrap contract signings increased by 27% YoY in Q1.
PubMatic believes it has become too difficult for publishers and buyers to stay abreast of the rapidly evolving market. As a result, PubMatic is focused on Supply Path Optimization and commerce media. As part of its SPO efforts, PubMatic is trying to deepen its relationships agencies and advertisers. SPO represented over 35% of PubMatic's activity in the first quarter of 2023.
Activate is an SPO solution that PubMatic has been working towards over the past 18 months. It leverages PubMatic's Martin acquisition and enables buyers to execute direct deals on CTV and premium video inventory through PubMatic's platform. Activate is not a demand side platform though, and does not seek to replace DSPs. PubMatic is not offering a number of services that are core to the value proposition of a DSP. Activate is designed to accelerate the transition of non-programmatic insertion orders for CTV and online video into non-bidded programmatic buying transactions. This is similar to Magnite's ClearLine solution.
Retail Media Networks have unique data that advertisers increasingly need access to, due to difficulties in attribution created by industry privacy initiatives. Retailers can drive growth by opening their shopper data up to advertisers in a privacy safe manner, helping advertisers to attribute sales to a campaign and optimize their ad spend.
Commerce media expands on the retail media opportunity set to include not just retailers, but a wide variety of transaction-based businesses like transportation or food delivery providers, travel and event providers, fintech companies and more. Data access and control are important capabilities for commerce media, both areas where PubMatic already has market leading solutions.
In response to privacy regulations, PubMatic launched its own ID-agnostic identity management solution called Identity Hub. Buyers using Identity Hub can recognize a publisher's audience through multiple IDs supported for each ad impression, increasing the value of a publisher's inventory. Identity Hub can leverage partner IDs like IAB DigiTrust, The Trade Desk Unified ID, ID5 and LiveIntent.
Financial Analysis
PubMatic's revenue growth has been weak in recent quarters, primarily due to macro factors. This is expected to be temporary though, with both market growth and market share gains expected in the long run. PubMatic estimates that its current market share is around 4-4.5% , a figure that PubMatic wants to increase to over 20%.
Revenue in Q2 of 2023 is expected to increase sequentially from Q1, although PubMatic is guiding for around -6% growth YoY.
Figure 7: PubMatic Revenue (source: Created by author using data from PubMatic)
Omnichannel video is currently an area of strength, contributing around 34% of PubMatic's revenue in the fourth quarter of 2022, with mobile advertising contributing 57%. Omnichannel video grew 42% YoY in 2022, and CTV tripled as the format continues to evolve towards programmatic. Video has not been immune from the slowdown though. Omnichannel video grew 13% YoY in the first quarter of 2022, with CTV revenue increasing by over 50%.
Display has been particularly hard hit by the macro environment, declining 11% in 2022. This has been problematic for PubMatic as display still accounts for roughly two thirds of its business. Display revenue decreased by 7.5% YoY in the first quarter, although was better than expected and showed sequential improvement.
PubMatic's recent poor performance appears to be primarily related to the macro environment, as the company continues to attract and retain customers. For example, publisher logo retention was 97% in 2022 and PubMatic's publisher and app developer customers increased by 14% in the first quarter of 2023.
Figure 8: PubMatic Net Dollar Retention Rate (source: PubMatic)
Gross profit margins have been under pressure in recent quarters, in part due to elevated depreciation expenses as the result of prior capacity build out. Gross profit margins are expected to increase throughout 2023 though.
Operating profit margins have also been relatively poor in recent quarters. Adjusted EBITDA and free cash flows have remained relatively strong though.
Figure 9: PubMatic Profit Margins (source: Created by author using data from PubMatic) Figure 10: PubMatic Operating Expenses (source: Created by author using data from PubMatic)
Job openings at PubMatic seem to indicate that the demand environment continues to be difficult. While the company is obviously focused on cost controls at the moment, an uptick in hiring would be expected when the market truly begins to rebound.
Figure 11: PubMatic Job Openings (source: Revealera.com)
Valuation
PubMatic's valuation is relatively modest given the long-term growth opportunity and the company's ability to generate free cash flow. There is likely ongoing investor skepticism regarding the strength of the SSP business model, but structural changes could reduce this concern over time.
There is currently little to differentiate PubMatic and Magnite, except for the fact that Magnite is a far larger company. To the extent that scale provides a genuine advantage, PubMatic may struggle to achieve more than a moderate level of success. Scale is potentially important for a number of reasons. There is an infrastructure component to SSPs which likely benefits from economies of scale. Similarly, scale helps to create an efficient marketplace for buyers and sellers.
Figure 12: PubMatic Relative Valuation (source: Created by author using data from Seeking Alpha)
For further details see:
PubMatic: Scale Could Be A Problem