Shutthiphong Chandaeng
Shutthiphong Chandaeng
PubMatic (NASDAQ:PUBM) had guided for a return to some growth in Q4. Due to quite a large beat and guidance for continued growth going forward, PubMatic is readily delivering on this thesis. For now, the company seems to be growing at around a low double-digit pace. While this is not a complete return to high growth, the valuation (at least non-GAAP) remains compelling even after the post-earnings stock increase, making for a GARP investment.
Previous coverage from two months ago highlighted the cheap valuation (as compared to free cash flow). This was combined with the guidance for a return to growth, and in general decent long-term prospects, such as due to its major new product introductions.
The company delivered a quite large beat of $6M, resulting in 14% YoY growth. PubMatic had previously highlighted some changes regarding Yahoo, and excluding Yahoo the growth was even stronger at 19%. From the roughly flat performance previously in 2023, this marks a quite sudden return to growth. For the full year, growth was 8%.
The performance was quite broad, across regions, categories, omnichannel video and display, with 29% impression growth YoY (offsetting a decline in CPM). Notably, mobile and desktop display revenue grew 27%. The top 10 ad verticals achieved similar performance as well.
Further, PubMatic noted that its emerging revenue streams added 3 points of growth YoY. During the Q&A, management also added that those revenue streams are more SaaS-like, which means they are more stable, and less dependent on the ad spend environment. It also suggested it was aiming to double that revenue by the end of the year.
Activity from SPO (supply path optimization) increased to 45% of total, up from 34% a year ago, with a 120% net retention. During the Q&A, PubMatic said it didn’t see any reason why that rate couldn’t be sustained at that level.
But the aspect with respect to emerging revenues is that something that is built on our innovation capabilities, and it's on top of our platform. And so we are finding significant pockets of opportunity, these SaaS business models, whether it be database through our Connect, OpenWrap software, enterprise-grade software, we are able to charge for that. And of course, the significant launch of ACTIVATE, which adds a net new revenue stream in terms of buyer fees.
On the profitability side, adjusted EBITDA margin was 46%, and PubMatic recorded its highest quarterly (and full year) FCF at nearly $20M (and $52.8M). The YoY FCF increase was 38%, driven by much lower capex spending of 70% less and other efficiency initiatives, including leveraging GAI. This means that even after the rally, the stock trades for around 20x FCF.
Lastly, PubMatic has extended its buyback program by $100M through 2025.
Due to the ‘more constructive ad spend environment’, PubMatic is planning to continue its double-digit growth, as well as some margin expansion, while also using this environment to continue to invest in growth (both opex and capex).
The result is a 2024 outlook for 10% net revenue growth (12% excluding Yahoo) and expanding adjusted EBITDA margin to 30%. For Q1, excluding Yahoo growth of 17% is expected, or 12% net growth. PubMatic said that January trends were “excellent”.
After the slowdown in 2023, PubMatic plans for double-digit growth going forward, after delivering exactly such an acceleration in Q4. Given its balanced spending plan to drive increased profitability as well, the valuation and therefore overall investment remains compelling.
Of course, the most bullish case was for PubMatic to replicate the performance of a company like The Trade Desk (TTD), which has seen strong growth for many years. In that regard, the current guidance for low-double digit-growth is still a bit off from becoming a ‘real’ growth stock again. On the other hand, the much less demanding valuation makes it more of a GARP stock. For example the performance of its emerging revenue streams, as well as the quite strong 120% SPO net retention in Q4, demonstrate that long-term continued growth (and therefore stock returns) should be well within reach.