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PubMatic Inc. (PUBM)

By: Bill Miller IV, CFA, CMT

May 29, 2024

Market Capitalization: $1.2B
Enterprise Value: $1.0B
Price: $23.50 (5/13/24)

What the Company Does

PubMatic provides software that connects advertisers with digital content creators (“publishers”). Through PubMatic’s supply path optimization (“SPO”) platform, advertisers can better understand which digital advertising opportunities are likely to provide the highest return on investment, while content creators can boost revenues by including targeted advertising in their digital content.

Why We Own It

PubMatic trades at a compelling valuation despite strong performance in a massive addressable market with significant growth runway and an aligned management team. After a hot IPO at the end of 2020, the stock quickly quadrupled to an all-time high of $76 in early 2021 and has since fallen back to a price near the IPO level despite meaningful business progress in the interim. At a high-single-digit free cash flow-to-EV yield, the market appears to be pricing in very little growth, even though the company just printed two consecutive double-digit topline growth quarters and record free cash flow. Ample runway for growth remains, as PubMatic cites an estimated market share of 4-4.5% versus a long-term target share of 20%+ in a digital advertising market projected to grow at 10%. Management, which owns over 9 million shares of B stock, has also demonstrated an ability to grow its addressable market with new product introductions.

How Management Allocates Capital

Investing in organic growth opportunities is the primary priority, though the free cash flow generation allows for Mergers & Acquisitions (M&A) consideration if a company has the potential to accelerate roadmap development. Management appears to agree with our assessment that PUBM shares remain an attractive investment opportunity, as shares outstanding have shrunk by almost 5% between the first quarter of 2023 and the first quarter of 2024, and management still has authorization to repurchase another 8% of the company.

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Enterprise value (EV) is a measure of a company’s total value. IPO is Initial Public Offering. Free Cash Flow to Enterprise Value (FCF/EV) compares a company’s ability to generate cash flow to the total valuation of the company. Free cash flow is earnings before depreciation, amortization, and non-cash charges minus maintenance capital expenditures.

The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice.

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