Where everybody knows your name, and they’re always glad you came: PubMatic $PUBM

Making your way in the world today

Takes everything you've got

Taking a break from all your worries

Sure would help a lot

Is there a sector with worse sentiment than advertising? I was shocked to see that during these last few years of a struggling consumer, pinched between inflation and stagnant wages, advertising spending only seems to go up every year. Sure, things aren’t great for newspapers and magazines, but overall advertising spending is in a bull market. I’ll add this to the long list of leading recession indicators that isn’t flashing any warning signs… yet.

PubMatic (PUBM) is just barely a rule of 40 tech company, striving to take some of that advertising market share. I say just barely, because in 2024 revenue growth was 9%, and EBITDA margin was 32%, putting PUBM just a single tick over the threshold. But, it is very interesting that traditionally a rule of 40 company would trade at a price to sales ratio of over 4x. And here is PUBM, trading at a price to sales ratio of 1.38x after the stock price collapsed from $24 a share last June, to $8.30 a share today. Since the end of 2021, sales per share of PubMatic are up from $4.01 to $5.57, while price to sales ratio has fallen from 8.5x to 1.38x. A truly remarkable multiple compression that can’t go on forever, but there are no technical indicators signifying that the bottom is in.

And this is for a company with very little long term debt, only $38 million, and who generated over $73 million of operating cash flow in 2024. The current market capitalization is only $402 million, making trailing 12 month price to free cash flow 5.47x. Or to say that another way, PUBM has a trailing 18.25% free cash flow yield, for a capital light business in a sector that shows secular growth through the Biden economy, the Covid durable goods pull forward, the inflation spike, and rising interest rates. Management is guiding for 15% revenue growth for 2025. And, PUBM has spent over $140 million on share buybacks in 2023 and 2024. Some of that buyback spend was to sterilize stock based compensation, but some of it actually did reduce the outstanding share count by about 8%.

I have to admit that I am a little out of my element looking under the hood of an advertising company, but the insight that I get into the overall economy is worth the discomfort of trying to expand my horizons. Even if I never pull the trigger and invest in PUBM, it’s worthwhile to keep an eye on one of the few genuine leading recession indicators. Businesses start to pull back on advertising spending before a recession hits, and no such pullback had started as of the end of 2024.

PubMatic is an interesting kind of company, trying to carve out a niche while competing against Google Ad Manager, Amazon Ads, Xandr now owned by Microsoft, and Magnite. PUBM competes with the behemoths by having incentives aligned with the advertiser, earning a percentage of the advertising spend while not being aligned with a specific publisher. While the walled gardens of the giants such as Facebook, TikTok, and YouTube are attractive, some advertisers are going to prefer advertising and storing their data outside of the mega cap tech companies, especially if their product competes with those same companies. There is room for an independent competitor.

But PubMatic is still at a relatively small scale to their competitors, and has a bit of customer concentration risk. As the internet becomes more cookieless, the larger platforms have more client data, and can target ads more effectively; PUBM will now have to partner with their larger competitors for this client data. Still, every year of growth and building client relationships creates a moat for PubMatic. The more that content creators turn to PubMatic, the more that advertisers pursue them, and so on and so forth. Network goods take time to build up, and PUBM has been slowly building their own marketplace. I might not be a tech expert, but I like any company that shows growth over these last few years, and whose market cap has crashed disproportionately to a reasonable multiple compression.

PUBM Revenues:

PUBM Market Cap:

When will the valuation of PubMatic recover? They are already implementing Artificial Intelligence in their platform, growing year over year and guiding for more growth. At some point the current narrative that AI will destroy every tech company will either be revealed to be correct or incorrect. When that day comes, these small tech platforms will either re-rate to a much more decent multiple, or they will have gone out of business. For the moment, things are going well for PUBM, with growth across all their advertising channels, mobile, closed circuit television, omnichannel, and emerging markets.

Revenue Share by Region:

With the recent shift toward sports gambling reinvigorating enthusiasm for live streamed sports, PubMatic stands to benefit as they have a focus on closed-circuit television advertising. Also, Roku Channel and Tubi have arrived in the marketplace with a free ad-supported business model, and are outside of the mega cap tech ecosystems. In 2024, Tubi captured 30% of the ad-supported video on demand business model, surpassing YouTube.

So the future looks bright for PubMatic, management is focusing on cost cutting, expanding margins, guiding toward 15% revenue growth for 2025, and engaging in share buybacks. It is still a founder-led company, with the cofounders sharing the CEO and CIO roles, and owning 20% of the company between them.

Putting a price target on a company like this is a bit like trying to catch fog in a bucket, but subscribers ask for a price target, even when my best answer is: “probably higher.” Assuming 15% revenue growth in 2025, and 10% in 2026, would give full year 2026 revenues of $368.5 million. If share buybacks shrink the float by another 7.5% over the next two years, that would be a share count of 44.9 million shares. Without any multiple rerating, that would imply a share price of $11.32 over the next two years from the current price of $8.30, or a 16.7% annualized return.

But, if there is a multiple rerating, which is highly likely as PubMatic is a tech platform / ecosystem / network good with a growing moat, has 32% EBITDA margins, and is actively engaging in share buybacks then the returns are much better. At 2x price to sales, end of year 2026 share price would be $16.41. At 3x price to sales, that would be $24.62. And at 4x price to sales, that would be $32.82. I’ll make a conservative price target and use the 2x price to sales multiple, which would imply a 40% annualized return per year for two years.

PubMatic (PUBM) $8.30: $16.41 by the end of 2026.