Investment Case Updated: May 19, 2025
Why Did We Sell
We exited our position in PUBM in Q4 2024. Despite a compelling valuation and strong performance in a massive market with long-term growth potential, it became increasingly clear that the landscape is far more competitive than anticipated. Major players like Google have a fortified position in the market that make it hard for other platforms to succeed and grow long term. This competitive landscape makes it difficult to predict how much market share for a firm like PubMatic can gain or take away from some of these major players, or even retain over time. We saw the market turning to the point where PUBM just gets out competed or even taken in by some of the fortified legacy players in the ad tech industry.
The broader ad tech sector still has potential for a cyclical recovery where PUBM could still outperform in the rebound scenario; however, we have the view that in this uncertain market there are better value opportunities that align better with our philosophies and goals of growing long-term wealth by beating the market. In our view, we believe that exiting this position allowed us to recycle the capital into more wealth creation; we recognized the mistake early and reallocated capital to positions where more upside was apparent.
We originally posted our investment case in May 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.