Ad-Tech Stocks Expected to Hold Onto Valuations Amid Industry Headwinds

The fervor on Wall Street around digital advertising is beginning to cool, as platforms like Meta and Snap showed themselves to not be immune from larger economic forces like inflation, rising interest rates, war in Ukraine and, specific to the industry, headwinds around new digital privacy regulations. Ad-tech companies, the middlemen of the advertising ecosystem, also face these threats, but may not shock the market quite so much when they report their first-quarter earnings in the coming days, analysts covering the space told Adweek. Ad-tech valuations have tumbled since last year, when several companies in the sector went public and the market was generally frothier. The stock prices of Integral Ad Science, PubMatic, Innovid—companies that all debuted on public markets in the past year and a half—have dropped more than 40% in the past year, and are seeing further losses with the rest of the public markets this week. At this point, most ad-tech companies are fairly valued, generally trading at multiples of five times their revenue, said Benchmark Company equity analyst Mark Zgutowicz. What Loss? Why Amazon Isn't Sweating Q1 Miss Case in point, Alphabet and Amazon saw their stocks decline on their first-quarter earnings reports during the last week of April (though not Meta). By contrast, two of the first ad tech companies to report notched gains after sharing their first-quarter earnings; Criteo’s stock rose 10% and Magnite was up 3%. But the sector, which provides the plumbing for digital advertising, is not a monolith. Analysts broke down which companies were most susceptible to headwinds, both macroeconomic and industry-specific, and tailwinds like CTV and retail media. More global, more risk Ad-tech companies with more clients overseas, especially in Europe, are more likely to face headwinds related to the war in Ukraine, said director of equity research at Evercore Shweta Krajuria. “When there is a macro pressure, the first cost-saving would be brand spend and then performance,” Khajuria said, noting European clients are more likely to pull back on ad budgets. The Trade Desk, whose business is more than 80% U.S.-based, faces less pressure than companies like Outbrain, where more than 40% of their business is in Europe. Pubmatic sees more than 25% of revenue coming from the Europe-Middle East-Asia (EMEA) region, analysts say. On its earnings call on Wednesday, Criteo said the loss of signals, including from iOS changes and the suspension of operations in Russia, was valued at $20 million. Magnite CFO David Day said the company saw some softening of CPMs, particularly in its non-CTV business in the EMEA region. Adjusting to the media mix, growth areas of CTV and retail media Many ad-tech businesses started by powering the display ads that appear on publishers' websites, a market that is being undermined by the crumbling of third-party cookies and mobile identifiers. That means less-tapped corners of the media budget, like connected TV and retail media, are growth areas for ad-tech companies. After subtracting traffic acquisition costs (TAC), retail media made up 14% of Criteo’s total revenue. The segment grew 46% year-over-year to $30.8 million, while sales for the rest of Criteo’s business contracted by 3% to $186 million in the first quarter. Magnite also is expected to benefit from ad spend on new media, with Khajuria noting connected TV is a tailwind for the company. In the first quarter of 2021, CTV made up 40% of Magnite’s business, compared to 20% in the prior-year period, excluding TAC. Magnite’s CTV revenue was up 250% in the year-over-year period, while its other business lines only increased by 35%. But not all ad-tech companies can count on new media for growth. Connected TV is already priced into The Trade Desk’s valuation, which reports on Monday, Zgutowicz said. The company currently trades at a multiple of around 15 times its revenue, significantly higher than its peers, Zguotowicz continued. This valuation might be hard to hold onto, especially as one of the company’s other strategies—its UID2 alternative identifier—is not seeing significant uptake by publishers, he added. Responding to the comments, a spokesperson for The Trade Desk noted that it believes its growth opportunity, in the programmatic ad ecosystem among others, remains vast and growing. They added that the potential for UID2 in the CTV space will also drive results. Furthermore, more big-name publishers are expected to officially announce their support of UID2 in the coming weeks. For other companies, such as Integral Ad Science and DoubleVerify, the fact that the market has already priced in ad buyers’ shuffling media mix is stabilizing. In a March 15 note, Daniel Salmon of BMO said that while there have been rumblings of publisher ire, particularly at IAS, for potentially scraping metadata from their sites, the market overly corrected for this risk. “This has no impact on core businesses of ad viewability, brand safety, and fraud management,” Salmon wrote. “Second, DV and IAS have a long track record of partnering directly with publishers to work together for solutions that help both.” IPG Announces It Will Join UID2 as Its First Closed Operator