This Digital Adware Tech Stock Beats The Nasdaq Index – Is It A Buy?

ByLance T. Lee

Sep 22, 2022

The digital advertising industry has been turned upside down this year. The angst started when Apple – in an effort to improve user privacy – made significant changes to the transparency of app tracking. Then the Federal Reserve began to raise interest rates in its effort to fight inflation. But it also increased the odds that the United States would slip into a recession, and recessions are typically characterized by lower advertising activity.

But one digital adware company is doing pretty well: DoubleVerify Holdings (DV -1.25%). It hasn’t been totally immune to the 2022 bear market. Its shares are down 19% so far this year, but that’s still significantly better than the 27% drop in the Nasdaq Compound index. More importantly, the business itself is booming.

A unique stock in the field of digital advertising

Many investors have become familiar with digital advertising companies that operate advertising marketplaces such as Alphabetis Google and The trading post. names like magnite and PubMatic, which help publishers list ad space for sale, have also become popular with investors. But DoubleVerify is something different: it’s a software company that helps these ad marketplaces and publishers measure the effectiveness of their ad campaigns.

There is competition in this space. Some small private farms offer suites of similar solutions. Big tech players, including Google, Amazonand Oracle also have competing offers. But DoubleVerify offers a differentiated set of tools. It’s also deeply integrated with over 1,000 different clients, including many of the companies mentioned above, as well as social media platforms such as Meta and Tik Tok.

DoubleVerify’s software suite includes tools that measure the viewability and effectiveness of advertisements, detect and prevent fraud (such as web crawlers), and ensure that a company’s advertisements are delivered to the intended audience. In short, they make digital advertising more efficient and profitable. And because the company’s revenue is largely based on ad volume, it’s not dependent on ultimate ad monetization like many other digital ad companies whose stock has been destroyed this year. As digital marketing gradually increases in prevalence, DoubleVerify should be able to continue to win.

Steady growth and profitability

Speaking of victory, DoubleVerify has posted fantastic financial results since its IPO in the spring of 2021, despite growing concerns about the onset of a recession. Revenue grew 43% year-over-year to $110 million in the second quarter, building on its 44% growth rate in the same period of 2021. Better yet , DoubleVerify was profitable with an adjusted EBITDA profit margin of 31%. His free cash flow can be very volatile year over year, especially at this early stage in the company’s journey, but he’s generated $12.9 million in free cash flow over the past few years. first six months of 2022.

With the company now making a profit, it does not need outside funding to finance its operations at this time. But it should be noted that DoubleVerify had nearly $224 million in cash and cash equivalents outstanding at the end of June and no debt. It’s also worth noting that its full-year outlook of 35% revenue growth at the midpoint of the forecast implies a downturn is ahead.

I see two things investors should watch closely here – things that are worth watching in the case of most small, fast-growing software companies. The first is evaluation. With an enterprise value to free cash flow ratio of 90, this stock is trading at a premium. The market has left little room for missteps in executing business growth.

Second, employee stock-based compensation, which has totaled just over $20 million so far this year. Earnings and free cash flow measured per share should help reflect the real growth of existing shareholders, and so far, all seems well on those fronts. But it’s worth monitoring to see if DoubleVerify can reduce these non-cash expenses over time.

Even in this bear market, I think DoubleVerify is an intriguing story worth considering. If you decide to buy, expect a lot of bumps in the road. Only invest in this business if you intend to hold the shares for years to allow time for this business to mature. But after its latest earnings update, I plan to add to my small position in this unique player in the digital advertising industry.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Nicholas Rossolillo and its clients have positions in Alphabet (C-shares), Amazon, Apple, DoubleVerify Holdings, Inc., Meta Platforms, Inc., PubMatic, Inc. and The Trade Desk. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, DoubleVerify Holdings, Inc., Magnite, Inc., Meta Platforms, Inc., PubMatic, Inc. and The Trade Desk. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

Source link