Small caps, and especially growth/tech small caps, have sold off furiously since early 2021. This indiscriminate panic selling has caused certain “babies to be thrown out with the bathwater” as valuations reset. Perion is a perfect example of this phenomenon. A rapidly growing, profitable small cap tech stock with a pristine balance sheet, huge margins, and a massive TAM with long-term tailwinds in the industry should not be trading at a valuation that more closely resembles that of a steel mill. I expect the stock to reset its valuation once the market is finally able to separate the winners from the losers in this great reset and short-term ad spend concerns inevitably abate.
Date: 7/26/2022
Share Price: $18.06
Current Market Cap: ~800mm
Sector: Tech – Adtech
Target Share Price: $87.22 (Base Case); $233.01 (Bull Case); $9.68 (Bear Case)
Recommendation: I remain very bullish on PERI, one of the leaders in the rapidly evolving adtech market. They provide brands and publishers with an opportunity to unlock lucrative growth opportunities across the three main pillars of digital advertising – ad search, social media, and display/video/CTV, representing a potential market of more than $300B. Their demand and supply side platform offerings for programmatic advertising campaigns offer greater ROI, transparency, and tracking for buyers and sellers of ad space, especially in the rapidly expanding CTV market. Additionally, their newly introduced SORT technology has the potential to be a game-changer as the entire industry moves away from cookies as a means of consumer tracking.
Marketers and advertisers have used cookies to target their audiences for the past 20 years. However, with growing concerns over data privacy, Google has published a timeline wherein it states that it will phase out third-party cookies by 2023. Similarly, Apple's IDFA updates have already pushed out the use of third-party cookies. Without cookies, advertisers will have to rely on alternative means of attaining audience insights. Accordingly, a survey conducted by the Boston Consulting Group and LinkedIn concluded that 39% of advertisers already stipulate that data losses have begun, negatively affecting their performance. PERI already has a superior solution for the loss of cookies. Neutronian critically acclaimed the SORT Targeting Technology in June for “outperforming third-party cookies while protecting consumer privacy and providing total anonymity by not tracking or storing user data," putting Perion at a huge advantage as we move toward a cookie-less world -- this is apparent from the recent financial statements, which were Perion's first full quarter results that included SORT.
Key investment risks center around further deterioration of the macro landscape. While small caps and growth appear to have been sufficiently punished during a selloff that started in February of 2021, the large cap names that comprise the indices threaten to bring markets lower if inflation is not reigned in in a timely manner. At this point, a recession seems inevitable, but it may also be the cure to our inflation issue. Companies will likely cut back on ad spending during such a time, but the secular trends in advertising dollars moving to adtech should buoy revenue growth rates until ad spending inevitably returns. Additionally, PERI will have to continue innovating across its platforms in order to continue growing, as it faces stiff competition from larger competitors.
Source: BCG
Marketers are already feeling the effects of the loss of cookies, making PERI an appealing partner thanks to it’s new SORT technology that has been proven to outperform traditional cookies.
Key Metrics:
P/E: ~10x TTM & ~9x FWD
This is ~40% below the average PE ratio of the S&P 500, yet PERI is growing ~10x faster than the 10-year avg. revenue growth rate of S&P 500 companies at 3.6%
Even without any of the expected multiple expansion for PERI when the market rebounds, our Base Case still has the stock trading at a fair value over 150% higher than current levels based on earnings growth out to 2028
Significantly better growth profile than most peers (see “Comps” model) trading at a 75% discount on multiple basis to larger companies like TTD
Over 40% of the equity value is now in cash/short-term investments after the follow-on offering last year
FWD EV/EBITDA multiple of just 5.04x (8.06x trailing)
The company states it is looking for acquisition targets, as the sector is ripe for consolidation
Needs to put the cash to work soon after raising it through an offering last year – they could buy back all the shares offered at a discount now due to the selloff
Reaffirmed guidance June 29 during the selloff while most other companies have been slashing 2nd half guidance due to the macro backdrop -- still targeting 32% YoY growth
Illustrates PERI’s resiliency and differentiated product with powerful secular tailwinds driving growth
Financial performance is directly linked to superior operational performance
Ex: PERI's display Clickthrough Rate (CTR) of 1.2 is 2.6x higher than the Google benchmark of 0.46, resulting in a 42% increase in average price spend and a higher average spend per customer, with a 3% YoY increase in the number clients
Record 42% EBITDA margin Ex TAC in Q1 2022, representing 158% YoY growth as the company starts to achieve scalable operational efficiencies
Adtech is one of the most capital efficient sectors of the market, making it more resilient to economic slowdowns and disruptions
80% YoY revenue growth from the Display Advertising segment was largely attributable to the wide adoption of SORT at about 30%
This has also moved the management toward providing improved guidance for the year as it expects its revenues to move further up amid aggressive SORT adoption
Moving away from search advertising revenue and focusing on the high growth display advertising categories
Display advertising was 42% of revenue in Q1 2021 and 55% of revenue in Q1 2022
In 2021, CTV grew 300% and 123% pro forma (acquired Vidazoo) and added 31 new customers in Q4 so 92 or 20% of their 412 active customers are using this channel as of year end 2021… there is plenty of runway left in CTV
Even in undervalued sector, PERI trades significantly below peer averages across all relevant valuation metrics (see model)
Source: Perion Website
Perion has many blue chip clients utilizing its software and will continue to add to the roster as the broader market shifts to programmatic advertising platforms.
Conclusion: PERI is one of the safest high-reward stocks in the market at its current valuation. Microsoft has named them “Microsoft Advertising's 2021 Global Supply Partner of the Year” for their work with Bing, and they boast an impressive roster of clients who will continue to spend on advertising each year, even if there is a temporary slowdown due to recession. Thankfully, with zero debt and a large cash pile, PERI is well positioned to weather any potential storm.
More of my research:
DCF Outputs – Current Share Potential (Current Price: $18.06):
Source: Perion IR Presentation
CTV will continue to be an area of high growth for PERI as companies move over to this growing sector of the advertising landscape.
Source: Perion IR Presentation