PubMatic is a fast-growing founder-led business that came public in 2020. this stock has been
absolutely crushed over the last year even though this company is highly profitable and continues
to grow fast we think that that's a mistake and we'll be buying $250 of this stock today
my name is Brian Feroldi and my name is Brian Stoffel thanks to commonstock for sponsoring
today's video as of the time is recording I do not own shares of chromatic and I do own shares
of PubMatic and let's talk about the company it is a true small cap stock coming in at under $1
billion dollars and trading under the ticker pubm pubmatics mission is to fuel the endless
potential of Internet content creators we think this is simple inspirational and optional awesome
PubMatic is focused on the digital advertising business specifically the supply side of the
business that's where internet content creators have space for advertisers to fill in PubMatic
not only helps these advertisers to find people to advertise on their platform but it also helps
them to maximize their revenue those content creators can go to Pub automatic and have
their ad inventory filled there now pubmatics business model is usage based which we really
like because it's growing and the company has a net dollar retention of a hundred and thirty
percent meaning they hold on to their customers and get them to spend more PubMatic does have to
Shell out a fair amount on sales and marketing in order to bring in new customers so it's customer
acquisition costs are medium demand for the company's products does seem to be recession
resistant although the growth rate is slowing now that the economy is slowing down on the plus side
the vast majority of this company's revenue is recurring in nature so how about the company's
month well we want to First Call out the network effect this is a weak moat but it's an important
one and that's because PubMatic is able to collect data first and second party data that it can then
use to better Target ads on its platform that is an important differentiator the more important
mode is switching costs once an Advertiser gets set up on pubmatics platform it becomes owners to
switch away this company's net dollar retention has been over a hundred twenty percent since it
came public book in 2020 which is an excellent result we also want to call out the fact that
pubmedic has a moat in the form of low-cost production that's because PubMatic has chosen
to build out all of its servers throughout the world and run its programming on their
own servers that has a high cost up front but as you can see once they get economies of scale the
cost per 1 million ad Impressions has fallen precipitously something that their upstart
competition cannot do we also think that the company has counter positioning against Facebook
and Google which are two of the biggest players in the advertising industry because PubMatic
works with everybody across the internet that is something that Google and Facebook cannot
offer however the company does not have counter positioning against its upstart Rivals now if
you add all of these things together Brian and I are both convinced that the modes surrounding
pubmedics business is expanding so how do the numbers look in a word great Revenue growth
has been above 42 percent since this company came public gross margin is nearing 75 percent
and it is profitable on a net income and free cash flow basis beyond that the company's balance sheet
is in great shape with over 160 million in cash no debt and Returns on capital for such a small
growing company are Believe It or Not hi so who's running the show here well both Brian
and I were delighted to see that all three of the company's co-founders are still actively
involved in the business and retrieve goal who's one of the company's co-founders is still in the
corner office employees give PubMatic great reviews on glassdoor.com and this team of
co-founders has a ton of skin in the game owning 24 of shares outstanding which is worth over 200
million dollars today well what about long-term potential we think that PubMatic has a low level
of optionality built into the platform its own history shows that the company rolls out new
products and services which increase its spending per customer we think that that can continue for
many years to come one Mark against PubMatic is the fact that it's already so profitable
meaning that there's not a whole lot of room for the company to increase its margins moving
forward on the the plus side the opportunity here remains massive with the total addressable Market
opportunity at nearly 400 billion dollars moreover the vast majority of this company's
revenue is organic in nature so how has PubMatic done for investors since coming public in a word
terrible it is losing to the market even though it has exceeded endless expectations and four out
of the past four quarters while the company is profitable it's primarily using those proceeds
to fund operations so at this time it's not buying back stock paying down debt or paying
a dividend so how about risks well the biggest one is competition Brian and I have researched it over
the past month and we call out magnite and perion networks as two companies that actually do more
business than pubmedic however we like the moats surrounding the business that PubMatic has already
established another risk to pay attention to is concentration risk one of pubmatics customers
represents about 17 of sales the loss of that customer would be a big deal for the company's
revenue and profits the only other risk that we want to mention is valuation although to be honest
with you quite favorable compared to most of the stocks we review on this channel we'll talk more
about that in a minute so how did PubMatic do in its mostly certain quarter the answer there
is quite well Revenue grew 26% to 63 million dollars exceeding wall Street's estimate and
Management's own guidance and earnings per share came in at 14 cents an adjusted basis also blowing
basketball streets targets it's worth noting that while gross margins and net margins were
down operating margins actually expanded so did the amount of free cash flow coming in and the
balance sheet is in Stellar position so how about guidance management believes that Revenue in the
upcoming quarter is only going to grow about 16 percent that matches what Wall Street was
expecting and it's also a significant slowdown from what the company just reported earnings are
also expected thick hit and are expected to decline about 50 to about 13 cents per share
it's a similar story if we look at the full year Management's expecting altogether 23 growth which
is ahead of wall Street's estimates management doesn't give guidance for earnings but Wall
Street is expecting again for earnings to about be cut in half to 58 cents per share so what do
investors like us need to watch moving forward first keep an eye on dollar-based net revenue
retention rate we want to see that customers are sticking with PubMatic and continue to spend more
over time second keep an eye on the amount of business being done in Connected TV and mobile
platforms that's where the growth is coming from right now third keep an eye on ad Impressions
and the company's internal costs PubMatic has been investing aggressively in its own network to bring
down those costs over time we want to see that Trend continue and finally watch free cash flow
one of the things we love about this business is that it's so small and growing and free cash flow
positive that Trend needs to continue overall we can't help but think that the company's moat
continues to widen and the thesis for owning a stock is fully on track so how about pubmatics
valuation well first we need to figure out where the company is in its growth cycle we would argue
that it's somewhere between stage 3 and stage 4 hyper growth and maturity because of that
the company's price to earnings and gross profit are fair measures for valuation what's exciting
for investors is we we think that PubMatic is fairly optimized for all of its metrics up and
down the income statement that means that the price to sales price to gross profit price to
free cash flow and price to earnings ratio are all meaningful numbers for investors to use so let's
take a look at those numbers right now PubMatic is trading for under four times trailing sales which
is its lowest level since coming public pubmatics gross profit has consistently grown since it came
public and recently clocked in at 181 million when compared to the company's current market
cap of 900 million that gives this company a price to gross profit ratio of about five that is a very
attractive number for a business of this quality and if you think that's attractive look at this
the company as we said is free cash flow positive and it is currently trading for less than 19 times
free cash flow a very fair valuation and low in historical perspective it's a similar number for
the p e ratio both on a trailing and forward basis coming in around 18 times those numbers tell us
that Wall Street expects this company won't be able to grow at a double digit rate ever again
which we think is incorrect so how'd this company score on our investing checklist the answer there
is quite well on my quality score I've got a 77 which is well into my investable category and
on my checklist it got an 11 and a half which is almost in the anti-fragile territory a rare feat
for such a small company so there you have it for all those reasons we'll be buying 250 worth
of the stock in our public portfolio that you can track by following us on common stock we'll also
be posting all the slides that you've seen here today so if you want to follow along with how
that portfolio is doing and see these slides for yourselves click the link in the video
description to follow us on common stock check on over there and leave a comment to let us know
what you think of this decision to buy PubMatic we hope that this video was helpful Brian's out