Ad-Tech And Perion Are Coming Back, Fast

Perion Network Ltd. (NASDAQ: PERI) is on a turnaround path for the last three years and the company’s three-pronged approach is starting to deliver, just when the digital advertising industry is showing signs of stability after suffering one of worth downturns due to Covid-19.

The stock is trading around levels seen five-year ago and this combination of business turning around and the industry fundamentals stabilizing do offer an opportunity to the stock to break out of the range.

After the weak second quarter, Perion has come back fast. When many players are shying away from giving guidance, the company was among the first ones to not just reinstate guidance but also to increase it meaningfully, i.e. second-half revenue growth of 38% over the first half and adjusted EBITDA growth of 100% during the same period.

Besides improving financials, recent acquisitions and expanding partnerships are making the business ready for the changing digital advertising industry, including ‘walled gardens’ to Google, Facebook, and Amazon, and diversifying revenue base.

If last year was about revenue growth coming back after multi-year decline, this year will about consolidation of the growth trend, outperforming peers and despite Coronavirus driven collapse in advertising budgets, positioning the business for acceleration of revenue growth next year, when advertising industry comes back and recent acquisitions start delivering. 

The stock is part of our portfolio and was included in our most recent weekly list of top ideas.

Rising tide

Yes, the first half has been bad for the digital advertising industry in general. Digital ad spending, after double-digit growth for almost a decade, is expected to increase by 1.7% in the US, down from previous expectations of almost 17% growth at the start of the year.

Google might see a decline in its US digital ad revenues. Facebook and Amazon are expected to grow but at deeply depressed rates. Earlier this year, CPM ad pricing fell as much as 50% on Facebook, highlighting the stress.

Things are starting to improve since June, with lower ad prices attracting advertisers that are scaling up spending in channels drawing increased consumer attention. High traffic channels like the Amazon DSP, paid search, and social are benefiting from fast-growing consumer news and digital shopping trends.

Digital advertising may be weak but there are some strong positive trends underneath.  Social media for one held up well, with Facebook increasing its share by 2% to 12.7% of the total, others including Instagram and Twitter followed the trend as well.

Why this sudden optimism and is it sustainable?

News and consumer consumption of online media is growing. Adtech is coming back
Source: IAB and Comscore

Now the key question among investors is what are the reasons behind the recent optimism, as reflected by the increased guidance, and whether the same is sustainable? The answer to both is yes and they are interdependent as well.

The shifts within the digital advertising industry are offering some good organic growth opportunities for Perion, among others. As the chart above shows, consumer consumption of news media is touching new highs, in line with the time spent on video platforms, social media, and other consumer-facing categories like gaming or online gambling.

First comes the viewer and then the advertisers follow.

Indeed, other than a few troubled categories like travel, global 1000 customers started placing campaigns for the third quarter by the middle of the second quarter, a great indicator of advertiser confidence, and improved visibility for Perion.

Increasing digital video consumption is helping the video business – Undertone, up more than 100% during the first half, with help from ad dollars moving away from linear TV.

Since Perion primarily sells rich media ad units that carry 5-7x higher CPM rates than the standard units, the business leads the industry demand trends given advertisers usually want to keep the number of impressions steady.

Partnerships are starting to deliver

The company’s search business, down 1% during the second quarter and up 8% during the first half, outperformed peers and withstood a 15% decline in the paid search advertising industry, downturns at both Microsoft and Google, and depressed CPC rates.

The strength in part is due to strengthening partnerships. The new MSN News product launch is delivering more monetizable search queries to Microsoft Bing and growth seems sustainable with expanding products and geographies.

MakeMeReach, the company’s social brand advertising SaaS platform, has expanded partnership with Havas Media Group, which will use the platform for social campaigns across the world. CodeFuel, publisher solution business, partnered with CheckPoint’s ZoneAlarm to help ZoneAlarm monetize its search offering.

Acquisitions, the strong strategic and financial argument

Besides accretive, recent acquisitions like Pub Ocean and Content IQ makes the company less reliant on any particular platform and further readies it for a cookie-less digital advertising ecosystem.

The next leg of growth will come from cross-platform integration, i.e. integrating CodeFuel’s signaling functionalities into publisher technology platform consisting of ContentIQ and Pub Ocean, and embedding Undertone’s capability to service high-impact ad units. This combination will optimize media buying campaigns and improve on-page monetization capabilities.

Investors yet to wake up to numbers

Perion stock. margins are improving and adtech is coming back.
Source: Perion network

Financially, margins are expanding and gross margins of 91.6% during the first half reached close to the levels seen in 2016, the peak year for revenues and margins over the last 5 years. With yesterday’s increased guidance, margins may see further improvement during the second half.

source: Perion Network

The balance sheet has also improved significantly, as the chart above shows.

 Next Yr. PEGross MarginsSales growth (Est. Current Yr.)Enterprise Value ($M)EV/ sales
Perion 2392%11% $149 0.6
Trade Desk 11274%10% $21,010 31.0
Magnite Loss55%26% $705 4.3
Gross margins for 1H 2020 and excludes stock-based compensation for all.

In the meantime, the Street has yet to believe any part of the thesis discussed in this note. As the chart above shows, the stock continues to trade a significant discount to its peers.

DISCLOSURE: We are Long Perion Network stock. Before writing a note, we usually ask (via Twitter and Stocktwits) for things readers would like us to cover in the note, please do share your views for our next note. This is purely an academic exercise for our internal use and you should NOT invest based on this note.

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