Outbrain (OB -1.33%), one of the world’s two largest platforms for “chumbox” ads, went public in July at $20 per share. The stock stayed flat on the first day, then subsequently tumbled to the mid-teens.
Outbrain’s dismal debut wasn’t surprising, since its main competitor Taboola (TBLA -2.41%), which went public by merging with a SPAC in June, has also lost more than a fifth of its value since its first trade. Outbrain had been in talks to merge with Taboola for several years, but the merger was cancelled last year amid COVID-19 related challenges.
Outbrain clearly didn’t impress the market, but could investors be overlooking its strengths? Let’s take a fresh look at Outbrain’s business, its growth rates, and valuations to find out.
Image source: Getty Images.
What is a “chumbox” advertising platform?
“Chumbox” ads are sprinkled across webpages as grids of thumbnail images which promote sponsored links. These ads, which are usually associated with tabloid and clickbait content, use attention-grabbing headlines like “You Won’t Believe What (Celebrity) Looks Like Now” or “1 Weird Trick to Lose Weight” to drive clicks to other websites.
The critics claim these ads are annoying and misleading, but they still generate plenty of revenues for companies like Outbrain and Taboola.
How fast is Outbrain growing?
Outbrain’s revenue rose 12% to $767.1 million in 2020, even as ad purchases slowed down during the pandemic, and grew 42% year over year to $475.2 million in the first half of 2021 as those headwinds waned.
Outbrain’s traffic acquisition costs (TAC) are also rising at a slower rate than its total revenues, increasing 11% in 2020 and 36% year over year in the first half of 2021. That tighter spending boosted its gross margin from 20.6% in 2019 to 21.5% in 2020, and 23.7% in the first half of 2021.
As a result, Outbrain generated a net profit of $4.4 million in 2020, compared to a loss of $20.5 million in 2019, and remained profitable in the first half of 2021 with a net profit of $25.9 million. Its adjusted EBITDA grew more than sixfold year over year to $45.2 million in the first half of 2021.
Outbrain achieved a net revenue retention rate of 150%, which indicates it won’t need to aggressively boost its TAC to retain its clients. It didn’t provide any revenue guidance for the full year, but it expects its ex-TAC (excluding traffic acquisition costs) gross profit to rise 37%-39%, and for its adjusted EBITDA to increase 96%-101%. Analysts expect its revenue to rise 30% for the full year and for its bottom line to stay in the black.
Why aren’t investors interested in Outbrain?
Outbrain trades at just 19 times forward earnings and less than one times this year’s sales. Taboola, which expects its ex-TAC gross profit and adjusted EBITDA to grow at slower rates than Outbrain this year, trades at 148 times forward earnings and four times this year’s sales.
That difference indicates that Outbrain’s traditional IPO was conservatively valued, while Taboola’s SPAC-backed debut was overvalued.
Investors seem reluctant to buy Outbrain for three reasons. First, chumbox ads are top targets for ad blocking extensions. Second, Apple’s (AAPL 0.20%) recent privacy changes to iOS and Alphabet’s (GOOG -0.67%) (GOOGL -0.79%) upcoming ban on third-party cookies in Google Chrome could throttle its ability to deliver ads.
In its S-1 filing, Outbrain warns that evolving beyond data tracking cookies “could be more disruptive, slower, or more expensive than we currently anticipate” and “materially affect the accuracy” of its ads. Many other advertising technology companies are grappling with the same challenges.
Lastly, it has customer concentration issues. Over the past two years, its two largest media partners each generated about 10% of its revenues. If ad blockers, cookie bans, and other platform changes alter how internet users view and click ads, it could potentially lose those big customers.
Outbrain looks like an undervalued growth stock
Outbrain’s tactics might be controversial, but companies are still buying up its ads and people are clicking on its sensationalized headlines. Apple and Google’s changes might affect its business, but the company is already addressing those challenges with the development of new algorithms.
Outbrain’s low enterprise value of about $900 million and its cheap valuations also make it an attractive takeover target for bigger tech or advertising companies. Therefore, Outbrain looks like an undervalued growth stock right now, and investors who believe Apple and Google won’t wipe out the advertising market should consider buying a few shares.
