Taboola.com Ltd. (TBLA, Financial) will report its first-quarter 2022 earnings on May 12. The stock is a potentially risky investment, but gets bullish ratings from Wall Street analysts.
The company
Taboola sells native advertising with a twist. Native advertising does not look or feel like advertising. Most often, developers create ads and recommend placements based on the preferences of the advertiser; i.e., advertising promotes their image. Advertisers choose the products to advertise. The choice of platforms, digital or print media, where and when are up to the advertiser. They hope to convince consumers the messages and products are appealing.
The company has one purpose: to reach and engage audiences and drive their business to Taboola's clients. The company creates ads using behavior data to build awareness, generate high-value leads and encourage customers to take action online. It partners with websites, devices and mobile apps, making recommendations on placements and editorial sites on the open web to clients.
After 11 years in business, Taboola went public via a special purpose acqusition company in June of 2021. Shares tumbled to unexpected depths, but the company struggled through, building debt to hold on to 1,700 employees. Its market cap tops $1 billion. The company operates an artificial intelligence-based algorithmic engine platform internationally covering about 64 million items in 13 languages.
Taboola software deduces assessments of what users might like to see from search engines' reports. It includes new and updated content in real-time, determining whether the searches are navigational, informational or transactional. The ads are not disruptive but discreet, buried in editorial sites.
According to Ignite Visibility, ads appearing on social network news feeds are called In-Feed ads, while Search and Promoted ads appear at the top of the sidebar on search engines and ads appearing as recommended articles are Content Recommendations. Adam Singolda, the founder and CEO of Taboola, told Forbes that a user searches for content, receives it on a share from others or opportunistically comes across content. Taboola helms all the possibilities, uncovering and driving content "you may like."
On its website, the company says its has over 500 million daily active users, 9,000 publishers, more than13,000 advertisers, 500,000 recommendations per second and 100 terabytes of data per day.
Taboola operates in an industry that is expected to fly to a total global value of $402 billion by 2025, according to data from ADYOULIKE. Unfortunately, native advertising spending took a beating during the Covid-19 pandemic.
As a result, Taboola's market cap also fell from $2.16 billion as shares tumbled some 54.6%. The high for the shares was $11.44. Trading volume has dried to a light average of 360,000 shares.
Potential opportunity
Despite its lackluster performance thus far, analysts appear to be optimistic about the stock. According to Zacks Investment Research, the average 12-month price target is $11.40; that is an implied upside of over 140%. I believe the stock will not hit that target, but has the oomph to move into the $7 range this year if earnings stabilize and revenue keeps growing. The consensus is earnings per share for the first quarter will be six cents and revenue will come in over $355 million.
GuruFocus has detected three severe warning signs. Other analysts barely cover the stock. Despite the exuberance for the digital advertising industry and analysts’ positivity, the low GF Score shakes my confidence in the stock:
The fourth quarter of 2021 was the company’s strongest financial quarter in its history. Shares were selling then for $7.78. The price plummeted after the good news. The share price is on an uptick over the past few weeks from its low of $4.24 on promising forecasts for its first-quarter results. Taboola's shares currently are at the fire-sale price of $4.75. Analysts had a moderate buy recommendation on the stock when it was priced at $9 per share. Now they give it a strong buy at half the price.
Meeting expectations
Management’s positive expectations for industry growth and Singolda’s outlook captivates the investment community.
The company predicts quarterly revenue will between $353 million abd $359 million versus consensus of $356.61 million. Similarly, gross profit is expted to range from $108 million to $112 million, while gross profit excluding traffic acquisition costs is anticipated to be between $134 million and $138 million. Taboola is also guiding for adjusted Ebitda of $32 million to $34 million and non-GAAP net income of $12 million to $14 million.
Revenue for fiscal 2021 was $1.38 billion, so expectations for revenue in 2022 are about $1.67 billion.
There are a lot of mixed messages about Taboola. Analysts recommend a strong buy, but hedge funds decreased their holdings by 112,000 shares last quarter. Short interest is negligible at 0.76% and declined over the past six weeks. Institutional investors bought shares in the last quarter, including ARK Investment Management LLC, Cannon Global Investment Management LLC, Cornerstone Investment Partners LLC and McDonald Partners LLC.
Digital ad spending increased 12% during the pandemic. At the same time, industry leaders warned ad dollar spending plateaued and will slow down.
The company holds over $310 million in cash and equivalents, but its total debt is $362.9 million as of the last report. Significant debt is a downer when the Federal Reserve is raising rates.
Growth continues at Taboola. Last October, Line Today Hong Kong, which has 188 million global monthly users, selected Taboola to power ad module recommendations. NBC Sports announced that same month a multiyear deal that all its digital properties will use Taboola exclusively for video monetization and content recommendations. I think the digital ad market is stabilizing while quality improves.
While Taboola is risky, it leads in an industry with a solid foundation. There is a Chinese proverb that luck overtakes sense: When you only have two pennies left in the world, buy a loaf of bread with one and a lily with the other.
