Adtech has seen extreme volatility over the past few years with Covid causing some stocks to see 1,000% gains in a brief period of time between 2019-2021, and then plummet by up to 80% in 2022. For the current year-to-date, many have rebounded despite reporting depressed growth levels.
Below, we review the stocks in the ad-tech sector to find out which companies have performed well in the recent quarter results and which companies stand out in revenue growth estimates, profits, cash flows, earnings surprise, and we also look into management insights.
Pictured Above: Ad-tech returns from Jan 1, 2022 to Dec 31, 2022. Source: YCharts
Pictured Above: Ad-tech returns since Jan 1, 2023 Source: YCharts
Top Ad-Tech Stocks with the highest revenue growth rates in Q1
Source: YCharts
Unity sits at the cross-section of cloud and ad-tech. The company’s revenue grew by 56% YoY to $500 million in the recent quarter, however, the revenue was down (2%) YoY on a pro-forma basis to reflect the ironSource merger that was completed in November 2022. The company beat its own guidance of $470 million to $480 million and the analyst’s revenue estimates by 4.3%.
Unity’s guidance for the next quarter is $510 million to $520 million, representing a YoY growth of 72% to 75% and 6% to 8% YoY on a pro-forma basis. Management is expecting the overall advertisement sector to be flat QoQ. Per the macro-outlook, they are still cautious, as the company’s CFO Luis Visoso said in the earnings call that “the economic environment is still volatile and uncertain.”
Perion Network is a small cap ad-tech stock with a market cap of $1.4 billion that has sustained a stronger bottom line than its peers. We covered this stock here. Revenue grew 16% YoY to $145.2 million. Management stated the company is likely to raise its revenue growth in 2023, when CEO Gerstel stated: “Given our current visibility, and the sustainability and predictability of our business model, we feel confident in raising annual guidance for the full year 2023.”
The company’s new 2023 revenue guidance is $725 million to $745 million, representing YoY growth of 15% at the mid-point, up from the previous guidance of $720 million to $740 million.
Quarterly Revenue Surprise.
Source: YCharts
Fubo beat analyst revenue estimates by 6.9% in the Q1 results, which led the ad-tech sector. The company’s revenue grew by 34% YoY to $324.4 million, and its North American business grew by 34% YoY to $316.5 million.
The company’s North American revenue guidance for the next quarter is $292.5 million to $297.5 million, representing a YoY growth of 36% at the mid-point. It also raised FY2023 North American revenue guidance to $1.235 billion to $1.265 billion, representing YoY growth of 27% at the mid-point, up from the previous guidance of $1.195 billion to $1.225 billion. It also reiterated its goal of being cash flow and adjusted EBITDA positive by 2025.
The company sees some improvement in its advertising business as the company’s CFO, John Janedis, answered to an analyst question on CTV advertisement demand trends. “And so when we looked at our Q1 results, to your point, we came in about flat on ad revenue. From a monthly perspective, let me just talk you through that and then I'll also go through 2Q in some of the categories. March was better than February, which is better than January. And I'd say if I sort of give you some of the numbers around that, January was down slightly, February, call it, flattish and then March was up a bit, maybe call it mid-singles. And then we're seeing further acceleration now into April and 2Q and so far April, I think finished up in the double-digits. So, we're encouraged by what we're seeing in terms of some of the trends.”
Revenue Growth Estimates for Q2
Source: YCharts
Unity leads with the highest growth estimate for the next quarter. Per what was already discussed, this is due to the ironSource acquisition. Unity is followed by Fubo and DoubleVerify. DoubleVerify’s revenue grew by 27% YoY to $122.6 million.
Revenue guidance for the next quarter is $131 million to $135 million, representing YoY growth of 21% at the mid-point. Analysts expect revenue to grow 22% YoY to $133.5 million.
Needham analyst Laura Martin raised the firm's price target on DoubleVerify (DV) to $45 from $35 and kept a Buy rating on the shares after attending an investor call with its CEO Mark Zagorski.
According to her note, Meta Platforms (META) accounts for half of the company's total social revenue, and the firm now believes that measurement revenue from Meta could double over the next 12-24 months after DoubleVerify adds brand safety suitability to its product suite, the analyst told investors in a research note. Retail media networks will drive total addressable market and revenue upside for DoubleVerify as more brands insist on closing the loop between ad spending and sales, the firm added.
Revenue Growth Estimate for Current Fiscal Year
Source: YCharts
For the current fiscal year, analysts expect Unity to have the highest revenue growth estimate among ad-tech stocks. It is followed by Fubo, which analysts expect to grow by 28% and DoubleVerify is expected to grow by 25%.
P/S Ratio (Forward)
Source: YCharts
Most ad-tech stocks are trading at a low valuation. The Trade Desk has the highest forward P/S ratio of 19.5. The Trade Desk has been trading at a premium valuation as its revenue growth has been stronger and its bottom line is better than its peers. The company’s 2022 revenue grew by 32% YoY to $1.58 billion. This revenue growth was exceptional while other ad companies struggled with growth last year, such as Meta, which reported a decline of (1%) in revenue.
The company’s CEO and Founder, Jeff Green, highlighted in the Q4 earnings call, “Specifically in the last 6 months of 2022, The Trade Desk started to separate from much of the digital advertising market in terms of relative outperformance. In the third quarter, we have reported 31% growth while our competitors were either in retreat or posting single-digit growth. That same trend continued into the fourth quarter as we grew 24% and most of our large competitors were posting between negative 9% and negative 2% growth. I don’t think we have ever had the level of industry outperformance in our 6 years or so as a public company as we did in 2022.”
Analysts expect revenue to grow 22% in FY2023 and continue to grow over 20% till 2030, with a revenue growth forecast of 30% for FY2028.
The company’s recent quarter revenue grew by 21% YoY to $383 million. While macro conditions remain uncertain and advertising budgets are carefully scrutinized, the management sees some improved visibility. Laura Schenkein, the new CFO of the company, said in the earnings call, “Turning now to our outlook for the second quarter. While macro conditions remain uncertain, visibility has improved slightly since the beginning of the year. We are cautiously optimistic and estimate Q2 revenue to be at least $452 million which would represent growth of 20% on a year-over-year basis.”
The company reported an operating loss of ($23.3) million compared to ($17.1) million for the same period last year. The increase in operating loss was due to increased operating expenses related to in-person events and travel this year that was stopped briefly post Covid. We have noted later in our article that ad-tech stocks have a weak bottom line. The company has a better bottom line than most adtech stocks, and in the recent quarter, it ranks 7 in the operating margin among the 17 stocks we track in the sector. The company reported an adjusted EBITDA margin of 28% compared to 38% in the same period last year.
Morgan Stanley analysts recently upgraded the stock to overweight from equal weight. “We see growth in ad-supported streaming and retail media as two of the strongest growth areas in online advertising and see the US CTV market growing at a ~18% '22-'25 CAGR while we forecast retail media (global ex-China) to grow at a ~17% CAGR. As the leading independent demand-side platform (DSP), TTD is well positioned to benefit from both trends,” the analysts said in a client note. “We believe TTD will be able [to] leverage its position as an independent player to sign more retail media partners…and ultimately be a leader in offsite retail media advertising,” they added.
Free Cash Flow Margin
Source: YCharts
Ad-tech is a very cash-efficient industry, evidenced by the robust free cash flow (FCF) margins, as seen in the above chart. The Trade Desk has the highest free cash flow margin of 46%, followed by Pinterest with 30%, and Netflix with 26%.
We had highlighted the Netflix’s cash flow turnaround in our editorial in July 2022 when we said, “The most important line item for Netflix is the company’s cash flow. Looking back, this has been troublesome for Netflix as the company lost $3.3 billion in cash in 2019 as it built up its original content pipeline. However, the company is on an entirely new trajectory with $1 billion in free cash flow expected this year and “substantial” free cash flow in 2023, per Netflix management.”
Operating Margin
Source: YCharts
Only five of the ad-tech stocks have positive GAAP operating margins in the recent quarter. Meta leads the sector, followed by Google and Netflix. We believe focusing on profitable companies or those with strong profitability paths is prudent during a time of current macro uncertainty.