Is PubMatic (PUBM) A Buy Now?

8/9/2023

$PUBM dropped ~33% after its earnings report on Wednesday.

What could bring a free cash flow generating company in a slowly recouping advertising market down by more than 30%?

Raymond James and Macquarie Analysts cut their price targets to $18 and $16, respectively, still above the current $12.5 price.

Is the price drop a chance to buy, or is the company failing its shareholders? Let's find out!

Unexpected Stuff In PubMatic's Earnings

One of the company's clients filed for Chapter 11 bankruptcy and owed PubMatic $5.7M. $PUBM had to deduct this amount as a bad debt from its earnings, resulting in a negative 9% GAAP net income margin.

Brand advertisements have started to slow down in June and July, after good March and April. -- overall impression is that the ad market is recovering, but apparently not.

PubMatic's Top line

$PUBM uses software to find the best advertising slots and match them with advertisers online, on mobile devices, and connected TV programs.

This Q, revenue was $63M and flat Y/Y.

However, there are a few leading indicators of future revenue growth:

Ad impressions grew 52% compared to Q2 2023.
Total number of active customers grew 13% Y/Y.
New product launches that expand the company's addressable market to video ads and optimization.

Comparatively, $TTD grew revenue by 2%

Score: Fair -- the leading indicators paint a positive outlook despite flat revenue.

PubMatic's Profitability

Company turned negative earnings due to $5.7M in bad debt from a bankrupt client and $2.1M in incremental acquisition costs.
Even Non-GAAP net income, excluding those one-time items, was down significantly sequentially and annually.

The leadership discussed that the investments in creating incremental capacity mean the GAAP-basis cost of revenue will stay stable even if the capacity increases. Consecutively, we should expect a higher gross margin and higher profit.

Score: Fair -- one-time expenses are dragging down profitability this Q, and higher margins are expected due to higher efficiencies created by investment in the infrastructure. Something to watch for!

PubMatic's Balance Sheet

~ $100M+ cash & cash equivalent
vs. No significant debt

Score: Good

PubMatic's Free Cash Flow

Free cash flow, a true indicator of a company's ability to make money, almost doubled compared to Q2 2022.

Score: Good -- Free cash flow is a primary priority for the company, and it shows.

PubMatic's Valuation

P/S of 7X!
To reach 7 times sales growth, PUBM requires 20% revenue growth per year in the next ten years. This is feasible if the advertising spend goes back to growth and the company's new product launches should help.

Using P/E, the company is quite overpriced, at 60X PE and 100+X Forward P/E.

Score: Bad -- watch for revenue growth and the impact of new product launches to justify the valuation.

Rule of 200

The last time I looked at the company, it scored well above 200, partially thanks to do solid gross margin and excellent retention rate.

This time, The company didn't share the retention rate! Questionable!

Revenue growth + Gross margin + Operating margin + Net retention rate
0% + 60% - 9% + ?

Score: Bad -- in the penalty box to see evidence of retention and margin expansion.