Best Adtech Stock: The Trade Desk vs. PubMatic
Advertising is undergoing a fundamental shift from traditional mediums to programmatic, omnichannel and digital formats. Digital advertising encompasses mobile ads, connected television (CTV), video, search, and more. The trading post (NASDAQ: TTD) operates on the demand side of the equation, working with advertisers and their agencies. PubMatic (NASDAQ: PUBM) occupies the sales side, working with publishers and developers. Together, these two companies are at the forefront of this changing landscape.
The case of The Trade Desk
With a market capitalization of $36 billion, The Trade Desk is larger and more advanced in its development than PubMatic, which is a small-cap stock. Although both companies are around 15 years old, The Trade Desk has been public since 2016, while PubMatic only debuted in late 2020.
Both companies are rapidly increasing their revenues. The Trade Desk posted more than $301 million in revenue for the third quarter of 2021, along with adjusted EBITDA of $122.7 million. Those numbers were up 39% and 59% year-over-year, respectively, and the adjusted EBITDA margin jumped five percentage points to 41%, a terrific sign for the scalability of the business. It marked another record earnings report for the company ahead of what could be a blowout fourth quarter. Due to holiday publicity, fourth quarter revenues are typically much higher for adtech companies. The Trade Desk achieved at least $388 million in sales for that period, which would easily surpass the prior year quarter, marking another record for the company.
The Trade Desk product is very sticky and customers love it. Its 95% retention rate is proof of this. Nor is the retention rate a new phenomenon. According to the company, it has been above 95% for seven consecutive years. Its earnings are also diversified across industries, with no sector accounting for more than 20% of the pie. This shows the broad appeal of programmatic advertising. By the end of the second quarter, The Trade Desk had a reach of 87 million households and 120 million CTV devices in the United States alone.
Growth stocks have had a rocky start to 2022, and The Trade Desk is not immune to this. The stock is currently trading more than 30% off its 52-week high. Due to this decline, the company is trading at a forward price-to-sales (P/S) ratio of 18.5 based on 2022 estimates. Given the company’s growth rate and huge potential , it is not unreasonable. In fact, the company has spent much of 2021 trading at a forward P/S ratio well above 20.
The case of PubMatic
PubMatic is an up and coming adtech company. The release of its third-quarter results saw its revenue jump 54% year-over-year. This is largely due to an excellent net revenue retention rate (NRR). An NRR greater than 100% means that existing customers are increasing their spending with PubMatic faster than any churn rate. For the last 12 months that ended with the third quarter, that figure was an incredible 157%. This clearly shows how much customers value PubMatic’s service. It also bodes well for the company’s “build and grow” strategy and underscores management’s competence. PubMatic reports that over 60,000 advertisers place ads on its platform. The company sees huge potential in the streaming TV market and has seen its revenue grow sevenfold over the past year.
PubMatic is also profitable under GAAP, unlike The Trade Desk. The company posted net income of $13.5 million on just $58.1 million in revenue in the third quarter, representing a net margin of 23%. That’s impressive for a company that continues to grow so rapidly.
The company also trades at very reasonable valuation multiples, given its growth. The forward price-to-earnings (P/E) ratio is slightly below 33, while the P/S ratio is below five. Still, not everyone believes in the stock. PubMatic has always had a high amount of short-term interest, and the stock price has hit highs of nearly $77 per share and lows of nearly $21 per share over the past year. It is important to remember that this business is still in its infancy and is subject to massive price fluctuations. It is also thinly traded, which can increase volatility.
Which stock is best will ultimately depend on your risk tolerance. PubMatic has huge upside potential, but is also quite risky given its size in an industry dominated by huge players. One question is whether it will have enough capital to continue to be competitive. As of last report, the company had just $137 million in cash and short-term investments. Also, while PubMatic’s revenue percentage gains are great, it’s not growing as fast as The Trade Desk on a dollar-to-dollar basis. On the other hand, The Trade Desk is a behemoth of a business that is expected to generate nearly $1.2 billion in revenue for the year 2021. Right now, The Trade Desk has a better risk-reward profile for long-term investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.