Advertising is a way for brands and businesses to get their message to the right customers. Historically, this was done through traditional mediums such as newspapers and TV, but has since expanded to the digital world. The industry as a whole is forecasted to grow at a 5.22% compounded annual rate to reach a value of $834 billion by 2028, according to R&M research. A key growth driver is companies in the "adtech” or advertising technology industry that include programmatic advertising platforms, which are better protected from a cookie-less world. Alphabet's (GOOG, Financial) Google is phasing out advertising cookies in 2024 and Apple’s (AAPL, Financial) Safari has already implemented blocks on third-party cookies.
Generally, stocks in this industry trade at a high multiple of sales. However, given the macroeconomic environment, a pullback in advertising spend has occurred, which has opened up opportunities in these stocks.
In this discussion, I will reveal my top two picks in this space. Let’s dive in.
Taboola
Taboola.com Ltd. (TBLA, Financial) is a leader in programmatic advertising. The company’s platform basically enables “contextual based” advertisements, which are based upon the website a user is visiting. For example, if a user is on a fishing website, then the strategic placement of fishing-related ads would make the most sense. This type of advertising could become vital given the death of the cookie, which has been annouced due to various privacy policy changes by Apple and the Google Chrome browser in 2024.
So far, Taboola has racked up exclusive partnerships with over 9,000 publishers, including Bloomberg, CBS, Yahoo, U.S Today and many others. At the other side of its marketplace are over 15,000 advertisers.
The business makes its money by taking a cut of advertising spend and providing a portion (two-thirds) of this to publishers.
Cyclical financials
Taboola reported mixed financial results for the first quarter of 2023. Its revenue of $328 million beat analyst forecasts by $15.8 million despite declining by 7.38% year over year.
This decline was expected due to the cyclical pullback in the advertising industry. The first quarter also faced a tough comparison relative to the solid 17.1% revenue growth reported in the first quarter of 2022.
In the first quarter, Taboola won a variety of new clients, including travel provider Conde Nast, news website The Blaze and Germany-based sports website Kicker. The company generally signs three to 10-year partnerships with its publishers and, therefore, is in a strong position when it comes to competition.
Its mission is to effectively become the “recommendation engine” for the open web. However, one negative is some of its on-page ads can look a bit like clickbait, in my opinion.
Approximately 70% of Taboola's revenue comes from its core advertising platform. The rest comes from its e-commerce offering and its own Taboola news product, which integrates news articles from all of its publisher partners.
Moving on to profitability, the company reported a loss of 9 cents per share, topping analyst forecasts by 7 cents despite its operating loss expanding to $28 million, which was worse than the $7.7 million loss reported in the year-ago quarter.
This was mainly driven by a slowdown in the advertising market and the top line, as its operating expenses did decline by $1.3 million year over year.
A positive is the company has a solid balance sheet with $274.4 million in cash and short-term investments. In addition, it reported $299.6 million in total debt, of which the majority is long term.
The business paid back $30 million of debt in April and is expected to pay back another $50 million later this year. In addition, management announced a $40 million share buyback program, which is a positive sign for investors.
Valuation
Taboola trades with a forward price-sales ratio of 0.74, which is lower than historic levels. It also trades at an enterprise value-to-revenue ratio of 0.76, which is cheaper than its five-year average.
Trade Desk
The Trade Desk Inc. (TTD, Financial) offers a similar platform to Taboola as it connects advertisers to multiple website brands, from the BBC to CBS and many more. However, the company also has unique partnerships with connected TV and podcast providers such as Hulu and Spotify (SPOT, Financial).
In addition, the company offers the easy purchase of out-of-home advertising, such as display screens in city centers. Internationally, Trade Desk has partnerships with China-based businesses such as Baidu (BIDU, Financial) and iQIYI (IQ, Financial), making advertising in Asia more seamless.
Growing financials
Taboola reported solid financial results for the first quarter. Its revenue of $383 million increased by 21% year over year and beat analyst forecasts by $18.6 million. This is surprisingly strong given the cyclical pullback in the advertising market.
Connected TV is the fastest-growing channel of its business, with solid growth in North America reported in the first quarter. Video (including CTV) contributed to the mid-40% range of its business, followed by mobile at the mid-30% range and display trailing at around 5%.
Moving on to profitability, the company reported $109 million in adjusted Ebitda, which contributed to 28% of revenue. Free cash flow was $177 million, with $500 million reported on a trailing 12-month basis.
Its overall earnings per share was 2 cents, topping projections by 10 cents.
This was a solid result given the company’s expenses rose by 41% year over year to $293 million (excluding stock-based compensation).
Trade Desk has a solid balance sheet to weather any economic storm with cash, cash equivalents and short-term investments of $1.3 billion. It also has $253 million in total debt, which is well covered.
The company bought back 5.1 million shares in the first quarter at a total value of $293 million, which was a positive for investors.
Valuation
The Trade Desk trades with a price-sales ratio of 28, which is fair value relative to its five-year average but significantly more expensive than competitor Taboola. However, I believe this is for good reason given the business is substantially larger and growing much faster.
The GF Value Line indicates a fair value of $109 based on its historical ratios, past financial performance and analysts' future earnings projections. The means the stock was modestly undervalued at the time of writing.
Final thoughts
Both Taboola and Trade Desk are poised to benefit from a cookie-less world. Trade Desk is a better company overall in terms of growth and scale. However, its valuation is more expensive and, therefore, it is more of a growth stock as opposed to a value investment.
