2 Top-Tier Undervalued Digital Ad Stocks

These stocks look undervalued based on their GF Value charts

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Jun 29, 2022
Summary
  • The digital advertising market is forecasted to be worth $786 billion by 2026.
  • The average person spends over 4 hours per day on mobile apps. 
  • These 2 stocks offer a great alternative to traditional ad providers.
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“Attention” is the most powerful commodity we have as consumers, and it is thus highly valued by advertisers. The global market for digital advertising was estimated to be worth $350 billion in 2020, according to a study by ReportLinker, and it is forecasted to grow at a rapid 13.9% compound annual growth rate up until 2026.

The two giants in the digital advertising industry are currently Meta Platforms (

META, Financial), formerly known as Facebook, and Alphabet's (GOOG, Financial)(GOOGL, Financial) Google. However, this duopoly has caused saturation in the advertising market and there is an ongoing shift towards third party advertising providers.

In this article, I reveal my top two favorite digital advertising stocks which are “best in breed” alternatives to the duopoly and are now undervalued relative to their GF Value charts. These companies are more niche but are widely acclaimed in the industry.

1. Digital Turbine

Digital Turbine (

APPS, Financial) is a leader in mobile app advertising. Its “ignite" platform is installed on cell phones by major carriers such as AT&T (T, Financial), Verizon (VZ, Financial) and Vodafone (VOD, Financial). The company’s advertisers include leading brands such as Amazon (AMZN, Financial), Uber (UBER, Financial), Bank of America (BAC, Financial) and more.

According to Digital Turbine, its app-based advertising model is driven by some key industry trends such as:

  • More time spent per day on mobile vs. browser (4 hours vs 23 mins)
  • 35% of all media time is spent on mobile, up from 30% in 2019
  • Global mobile advertising market is estimated to grow from $340 billion in 2021 to more than $600 billion in 2025.

Digital Turbine offers a “single tap” install service, which removes a lot of the friction associated with app downloads and increases installs.

Digital Turbine recently announced financial results for its full fiscal year of 2022. Revenue for the year totaled $748 million, up a meteoric 138% year over year.

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Non-GAAP adjusted net income was $170.6 million, which was an increase of 124% year over year. Digital Turbine’s margins have been stable at 46% for the gross margin and 12% for the operating margin.

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The stock is trading substantially below the GF Value line, indicating undervaluation. However, it does also indicate a possible value trap due to the sharp decline in share price coupled with how high the valuation multiples were during the stock bubble phase in the past couple of years.

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2. Magnite

Magnite (

MGNI, Financial) is the world’s largest independent sell-side advertising platform and reaches over 1 billion people globally. Its share price went on a meteoric rise in 2020 and increased by nearly 1,000%, but since high inflation hit, the stock has declined by a substantial 84%. This was also driven by slower growth in Magnite’s connected TV segment, which was caused by a “one time issue” according to the company.

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The company’s platform is catered to helping publishers such as cable news providers and network TV stations sell their advertising inventory to a network of global buyers. They optimize publisher revenue by offering an auction-style process, where the highest bidder wins the ad slot. Magnite makes its money by charging a 10% take rate on all ad spend by buyers.

Magnite formed in 2020 following a merger between Rubicon Project and Telaria. They announced that they have acquired Carbon, a platform which enables publishers to track and monetize audiences in real time. The beautiful thing about Carbon is it can target audiences without relying on third party cookies. This is a real game-changer for advertisers, especially as cookies are being phased out by the likes of Apple (

AAPL, Financial) and Google Chrome.

Magnite also recently acquired SpotX for $1.17 billion in cash and stock. This has given Magnite a strong share in the connected TV ad market, which is becoming a popular place for advertisers.

Magnite reported strong earnings for its first quarter of 2022. Revenue (excluding traffic acquisition costs) grew by a rapid 79% year over year to $107 million. This was driven by Magnite’s connected TV segment, which saw tremendous growth of 253% year over year.

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Non-GAAP earnings per share increased to $0.08 in the quarter, up from $0.03 in the prior-year quarter. Operating cash flow was $20.1 million and adjusted Ebitda was $28.8 million.

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Magnite trades significantly lower now than it has in the past couple of years. The GF Value line rates the stock as a potential value trap due to the sharp decline in share price and the previous stock bubble status.

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Final thoughts

The advertising landscape is changing rapidly, driven by a saturated market, increased spend and the death of the ad cookie. More ad buyers are looking to alternative publishers in order to get the most out of their ad spend. In this environment, I believe investors might find it worthwhile to look into these best-in-breed platforms which have seen significant pullbacks in share price and now look undervalued.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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