Now that oil prices have fully recovered from the pandemic, we have turned our attention to a new sector that we feel is currently extremely undervalued in the current market. We are still holding onto most of our position in CDEV, CPE and LPI after returns well over 1000%, as we feel there is still some room to run as these companies finally start to return capital to shareholders with increasing oil prices. However, the lower the adtech sector goes, the more we start to redeploy capital into our favorite names through equity and LEAPS. These are all fundamentally sound growth companies trading like value stocks -- in a down market, fundamentals are one of the only things good stocks can fall back on for support, which is why we feel comfortable scaling in here.
Not sure what adtech is? We will dive into detail below, but the simplest way to think about it is these adtech platforms allow publishers with ad space to connect with buyers of ad space in an efficient, real-time online platform.
What is Adtech?
Adtech is an overarching term that describes the tools and software advertisers use to reach audiences, and deliver and measure digital advertising campaigns... as buying and selling digital ads became more complex, adtech emerged to streamline the process
The key components of the sector that are experiencing the most Wall Street attention at the moment are demand-side platforms (DSPs) and sell-side platforms (SSPs)
DSPs are organized marketplaces where advertisers access publisher inventory through direct integrations, supply-side platforms (SSPs), and ad exchanges
This side of the equation is a bit easier to understand, and The Trade Desk (TTD) has dominated this sector since inception
SSPs are a tool for publishers that automate selling digital ad impressions including video, display, and mobile ads. It is driven by the supply side of the advertising equation: the publishers who want to sell their inventory. SSPs let publishers, ad networks, and ad exchanges sell impressions to a greater pool of potential buyers and allow publishers to set the bidding range to maximize their revenue
This entire sector is meant to help the publishers to connect with the advertisers on a real time basis to sell the ad inventory and maximize the revenue. The adTech platform is also helping the publishers to connect with various DSPs to efficiently manage their ad inventory
This side of the equation is much more fragmented, with some of the smaller players even branching off to offer both DSP and SSP services on their platform, which some view as a conflict of interest
Why Adtech and How to Invest
The digital advertising landscape is rapidly changing.. while banner ads on websites still have their place, the next big growth frontier is in connected TV (CTV), as most people cut the cord and/or transition to watching more of their television on various streaming platforms
As per Statista, programmatically sold advertising was worth $129.1 billion in 2020 and is expected to reach $155 billion in 2021. The digital transformation caused by the COVID-19 pandemic has driven numerous businesses to adopt automated solutions. The market will continue growing and e-marketer estimates that the companies may spend 91% of their advertising budget on digital display ads and programmatic advertising
“Prior to the pandemic, we’d had high expectations for CTV ad spending in 2020, but they have been repeatedly exceeded. Our estimate of the CTV user base in the US has changed, too—we now expect 213.7 million people to use the internet through such a device at least monthly in 2021, compared with our pre-pandemic forecast of 208.1 million. In addition, we’ve revised our 2021 figure for traditional pay TV households downward, from the 76.8 million we had expected prior to the pandemic to our current forecast of 74.0 million. CTV is benefiting from the general increase in programmatic video advertising. In 2022, video will account for more than half of all US programmatic display ad spending." - Insider Intelligence
The global digital video advertising market is expected to grow at a CAGR of 41.1% from 2020 to 2027
We don't want to pay an astronomical multiple for TTD on the demand side when there are so many SSPs trading at PE multiples closer to 20 in the small cap growth selloff, despite growth rates north of 40% YoY (we think TTD can still be a good investment on pullbacks as a clear industry leader)
Headwinds from slowdowns in ad spend across most companies during Covid have not been enough to stop the tremendous growth we are seeing across the entire sector... marketing has been and will continue to be the lifeblood of most companies as we move forward
Our Favorite Stocks
After this massive selloff across all small cap growth stocks, we currently sit near a 20 year low in small cap valuations, according to JP Morgan research. This selloff has pulled all of our favorite SSP stocks back into the buy range at the equity level, with the potential to buy cheaper LEAPS out to 2024 in the hopes of returning to the highs we saw just last year.
We are buying a basket of these equities, as we feel all will be winners at these prices, and we expect consolidation to take place moving forward.
1) Pubmatic (PUBM)
"An NRR over 100% means existing customers are upping their spending with PubMatic faster than any customer churn. For the trailing 12 months that ended with the third quarter, this figure was an astounding 157%. This clearly shows just how much customers value PubMatic's serv
"Overall, the digital ad spend globally is expected to grow about 20-ish percent this year. The current projections it will be about 10% to 12% next year. We expect to grow faster by double that rate in 2022." -Steve Pantelick (CFO of PUBM)
Article offers a great explanation of why PUBM will not be negatively affected by the changes at Apple and Google regarding cookies and tracking for advertising purposes
T-2) Tremor (TRMR)
"The company offers innovative CTV header bidding, machine learning capabilities, and access to tons of data from consumers. Already with large brands among its clients, in my view, Tremor will most likely receive the attention of more large groups in the future."
Tremor International acquired Unruly from media giant News Corp International. As part of the deal, News Corp International has a sizable stake in Tremor, a seat on the board and a vested interest in making it succeed. This opens the doors to many new markets and advertisers that it may not have otherwise reached. This moved the company up to being a major player, and it was one of the reasons that Tremor, that was previously listed in London, moved to dual list in 2021 with a New York listing
*Tremor has both a DSP and SSP component
T-2) Perion (PERI)
"The company generates revenues from 2 main sources: Display Advertising and Search Advertising, with both segments contributing almost equally to the company’s revenue at about 51 and 49 percent, respectively, for the nine months ended September 30, 2021. Search Advertising is fueled by an agreement with Microsoft (MSFT) ‘Bing,’ which has been renewed till 2024, while Display Advertising has shown tremendous growth through 245% year-on-year growth in the video and Connected TV (CTV) revenues."
Peri recently completed another share offering in December 2021, further diluting equity holders....while this move will probably net accretive, it is something to be aware of moving forward
Their recently launched SORT technology is a cookieless tracking solution that came into being after 2 years of the company’s efforts. According to the company, Neutronian, a pioneer of independent data quality certification, audited the technology and was awarded Neutronian’s Cookieless Certification. Additionally, the technology showed positive results that SORT can outperform traditional cookie-based targeting systems
The 109% customer retention rate and the 30% growth in its average contract size show that the company is attracting more business
4) Magnite (MGNI)
Expects to grow its revenue an average of 25% in each of the next five years
However, while these other companies have chosen to mostly go the organic route for growth, MGNI is an amalgamation of many different companies that have been put together over the past few years
MGNI has accumulated substantial debt because of its acquisitions... As of the end of September 2021, it had $719 million in long-term indebtedness, offset by only $188 million in cash and equivalents
Even management thinks the steep decline in share price is a buying opportunity, as it announced a $50 million share-repurchase plan in December
Great overview of how so much advertising still runs through Google and how other companies are forced to adjust
MGNI is pointed out as the largest SSP but also the worst performer recently
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