Blogs -Ad Tech Stock Earnings - What to Expect for Q3 2021 Earnings

Ad Tech Stock Earnings - What to Expect for Q3 2021 Earnings


October 15, 2021

I/O Fund

Team

In this earnings preview, we review key companies in ad-tech to gauge what to look for in the upcoming Q3 earnings reports. Last quarter, ad-tech saw a rebound in ad spend from Covid yet it’s likely we saw the high-water mark for many companies as the ad industry faced extraordinarily low comps coming out of the historic lows of Q2 2020 when Covid led to reduced spend.

Snapchat will be the first among the ad-tech companies to kick-off the Q3 earnings when it reports on October 21st. In the analysis that follows, we give a brief overview of the ad-tech sector and discuss key trends that investors should be aware of heading into Q3 earnings.

Below is a table of ad-tech stocks ranked by their EV/Fwd sales multiples, along with their most recent YoY growth rate, gross and free-cashflow (FCF) margins. Many Ad-tech names are growing strongly, but M&A activity has inflated some growth rates such as APPS and MGNI. Adjusting for acquisitions, APPS and MGNI reported pro-forma sales growth rates of 104% and 79%, respectively. PINS had the strongest organic topline growth at 125%, as international sales at the company surged 227% YoY during Q2.

Top 10 EV / Fwd Revenue Multiples

However, we can see the high-water mark starts to kick in with the upcoming quarter. Looking forward, Digital Turbine is forecast to grow the strongest in Q3, but this is skewed due to the company’s recent acquisitions. FUBO has high expectations heading into Q3 as subscriber growth from the NFL season which started in Q3 should help fuel sales growth at the company.

Top 10 Three-month Forward YoY Growth Rates

The below table ranks the ad-tech stocks that saw the largest one week change in their share price. With Ad-tech earnings on the horizon, the market may be pricing in which stocks it anticipates to perform strongest. Notably, Digital Turbine and HubSpot have been strong all year and have been some of the strongest Ad-tech stocks recovering from the recent sell off in tech stocks. 

Sign up for I/O Fund's free newsletter with gains of up to 1100% - Click here

We can also see the market continues to question Fubo per the YTD price action below. We’ve written in detail as to why we think the company is stronger than the market realizes due to tailwinds from OTT live sports specifically and the monetization potential from sports betting. We’ve also recently commented on Twitter that Roku is likely to do even better globally than domestically as ad-supported streaming will be preferred over subscriptions in countries with lower GDPs. Considering that the Roku team created the leading operating system in 2008 and has led in the United States for 13 years over Amazon and Google, we think the team is capable of entering new geographies.

Top 10 Weekly Share Price Movement

In the table below, ad-tech stocks are ranked by percentage of change in their forward sales growth estimates over the last 90 days. A rise in growth estimates can lead to a higher multiple, however the market remains in a “wait and see” stage for names such as FUBO and PUBM, as their stocks have declined despite an increase in forward expectations. FUBO has high expectations as sports streaming from the NFL should boost revenues, while PUBM is a relative newcomer to the Ad-tech market and the Street may be waiting for the company to prove it can compete. In general, PubMatic is in a tough place to compete in the tech stack due to the number of competitors on the supply side.

Top 10 Changes in sales growth estimates – last 90 days

Although ad-tech has seen some double-digit declines over the past three months, we do not think this will last for long. Ad-tech is a robust industry that is cash efficient and tends to outperform other sectors in tech. For instance, two of the FAANGs are ad-tech related and there could be more tailwinds for those who hold first-party data as Facebook and Apple duel over third-party ad tracking and measurement. We covered this here.

At the I/O Fund, we have plenty of exposure to ad-tech and are not concerned with any temporary pullbacks.

Update on multiples

Below, I give an overview of topline multiples for the Ad-tech sector. The multiples shown below are calculated by scaling Enterprise Value (market cap + debt – cash) to forward sales. A higher multiple means the company has a premium valuation.

Overall Ad-tech stats:

  • Overall Ad-tech forward median 7x
  • Top 5 Ad-tech forward median 24x
  • Overall Ad-tech forward average 10x

EV/FWD SALES:

Ad-tech valuations peaked during the beginning of the year and have trended down since. The multiple compression has driven the median Ad-tech EV/Fwd sales multiple to 7x, which is below the median 10x multiple that Ad-tech received heading into Q3 earnings last year (2020). If Ad-tech performs strongly in Q3 2021, then the Street may award Ad-tech a higher multiple.  

Sign up for I/O Fund's free newsletter with gains of up to 1100% - Click here

The I/O Fund has stated that we see the current market as a buying opportunity with an in-depth macro analysis from Portfolio Manager, Knox Ridley. The valuations illustrate that we are nearing the 6 Median EV to Forward Revenue and the 10 Average EV to Fwd Revenue, which barring a black swan event like March of 2020, is low for ad-tech valuations. We to tend not hunt for bottoms, rather we prefer to trim near tops and add to key positions near bottoms. Therefore, for the style of the I/O Fund, the current valuations are a buying opportunity and we sent a recent Roku buy notification to our I/O Fund Members at $309.30.

By bifurcating the data for the top 5 in the chart below, we see the valuations in some names have largely recovered their multiple compressions since the beginning of the year. Snap, The Trade Desk, Hubspot, Roku and Pinterest have the highest valuations. The recovery in these premium valued names suggests that the market believes that these five stocks will likely outperform the rest of the group going forward.

TOP 5 EV/FWD SALES:

Below, we break the valuations into the following buckets:

  • Ad-tech High Growth Median EV to Fwd Revenue 10x
  • Ad-tech Mid Growth Median EV to Fwd Revenue 4x
  • Ad-tech Low Growth Median EV to Fwd Revenue 4x

We can further dissect the change in ad-tech valuations by breaking up the group into high growth (>30%), mid growth (>15% and <30%) and low growth (<15%). The above chart shows that the high-growth Ad-tech stocks were valued higher earlier in the year, as the market may be anticipating a slowdown in ad spend in the near term.

EV/FWD SALES IN GROWTH BUCKETS:

 

The chart below highlights the large gap in valuations for ad-tech leaders such as TTD and SNAP and the rest of the sector. SNAP and TTD are valued ~400% higher than the median multiple of 7x, while relatively new entrants PUBM and TRMR are valued below the Ad-tech median, at 6x and 4x, respectively.

EV TO FWD SALES Ad-tech UNIVERSE:

We also include a chart based on EV to Fwd sales but this takes into account forward growth expectations. By scaling valuation relative to forward growth, we can more clearly see which companies are cheapest relative to forward growth. Stocks on the right side of the chart below have the cheapest growth, meaning that they are trading at a bargain. Some standouts are SNAP, which fell from being valued 4x the median to just 2x the median once growth was accounted for. Moreover, FUBO is one of the cheapest Ad-tech stocks when considering their forward growth rates. TTD remains the most expensive and APPS and MGNI are skewed by recent acquisitions, meaning that they appear cheaper because of acquired sales.

Growth adjusted EV/Fwd Revenue (EV/Fwd Rev/Fwd Growth)

Finally, the last table we will be discussing are ad-tech operating metrics. The above table shows that the group as a whole is performing well, as the average median growth in the most recent quarter was a strong 81%, however this should be discounted due to the low base period in the prior year due to Covid (discussed above). Looking forward, the market expects ad-tech to continue to grow strongly as the median growth estimate is 38%.

The ad-tech market appears well positioned to continue to do well going forward. Find out which stocks the I/O Fund will be watching heading into Q3 earnings in our Q3 Stock Earnings Preview - What to Expect for 7 Ad Tech Stocks.

Bradley Cipriano and Royston Roche contributed to this article.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

Gains of up to 403% from our Free Newsletter.

Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!

+344% on Nvidia

+403% on Bitcoin

+218% on Roku

*as of March 15, 2022

Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.

If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 324% on Zoom, 601% on Nvidia, 445% on Bitcoin, and 4-digits on an alt-coin. The I/O Fund is audited annually to prove it’s one of the best performing Funds on the market with returns that beat Wall Street funds. 

More To Explore

Newsletter

Podcast on Cloud Stocks: Consumption Model Vs. Subscription Model

In October, we talked with Jeremy Owens of MarketWatch on a Barron's podcast about the consumption model versus the subscription model. With Snowflake reporting this week, it's a good time to revisit

December 02, 2022

Nvidia Stock: Evidence Gaming Bottomed And Why It’s Important

The new Ada Lovelace architecture uses 76 billion transistors and a 4nm production process. In the keynote, the CEO stated: ‘Nvidia engineers worked closely with TSMC to create the 4N process optimize

November 29, 2022

The Low is in for Bonds, As Well As Most Stocks (For Now)

Last week, the market went through one of the largest intraday swings since the bear market began in 2022. Since then, we have reclaimed that high. The question is: what does this mean for the market

November 11, 2022

We'll know this week if the low is in

Capitulation seems to be taking hold in many tech stocks, specifically in the SaaS/Cloud space. The market has been trained to look to tech, specifically FAANGs, as the sector to lead. However, what i

November 10, 2022

FAANGs are not Leading this Market Lower

Panic selling commenced in the broad market after the FED's recent attempt to stop a rally. Interestingly, the bond market doesn't seem to buy it, nor do many key value stocks in the U.S. The divergen

November 04, 2022

Meta Stock: The rising expenses and Capex are worrying

Meta shares nosedived 25% after the company's recent Q3 results. Meta's expenses are rising and the company is seeing softer revenue growth and softer margins. The slowing advertisement revenue has fo

November 04, 2022

Netflix Stock Will Be A FAANG Again

Netflix lost it’s status as a FAANG when the stock fell from a $300 billion market cap to a $100 billion market cap this year. My firm entered Netflix in August as we fully expect the stock to become

November 01, 2022

This Bear Market Rally has much Further to Go

Markets do not top together, nor do they bottom together. For this reason, identifying the leading markets can help you stay ahead of the trend. We continue to see evidence of these divergences, which

October 28, 2022

Divergences Point Toward Market Moving Higher (Technical Analysis)

Divergences are important to track. There is always a leading market that can provide advanced warning that a top or bottom is ahead. For example, from the COVID low in 2020 through February of 2021,

October 21, 2022

Sentiment and Divergences are Pointing Up

The stock market continues to power higher on the heels of bad news. We are up over 6% since the CPI reading signaled that inflation is stickier than hoped. The last time we saw the broad market ignor

October 19, 2022

Sign up for Analysis on
the Best Tech Stocks

The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio of 30 positions, a private forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2022
Get Free Weekly Analysis on the Best Tech Stocks