PubMatic (PUBM)

Programmatic advertising platform Pubmatic (NASDAQ: PUBM) announced better-than-expected revenue in Q1 CY2025, but sales fell by 4.3% year on year to $63.83 million. Guidance for next quarter’s revenue was better than expected at $68 million at the midpoint, 0.6% above analysts’ estimates. Its non-GAAP loss of $0.04 per share was $0.03 above analysts’ consensus estimates.

Company Overview

Founded in 2006 as an online ad platform helping ad sellers, Pubmatic (NASDAQ: PUBM) is a fully integrated cloud-based programmatic advertising platform.

The digital advertising market is large, growing, and becoming more diverse, both in terms of audiences and media. As a result, there is a growing need for software that enables advertisers to use data to automate and optimize ad placements.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, PubMatic grew its sales at a weak 6.6% compounded annual growth rate. This fell short of our benchmark for the software sector and is a poor baseline for our analysis.

This quarter, PubMatic’s revenue fell by 4.3% year on year to $63.83 million but beat Wall Street’s estimates by 2.8%. Company management is currently guiding for a 1.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.3% over the next 12 months, similar to its three-year rate. This projection is underwhelming and suggests its products and services will face some demand challenges.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for PubMatic to acquire new customers as its CAC payback period checked in at 58.9 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like PubMatic, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

PubMatic’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 64.9% gross margin over the last year. That means PubMatic paid its providers a lot of money ($35.09 for every $100 in revenue) to run its business.

PubMatic’s gross profit margin came in at 59.9% this quarter, marking a 2 percentage point decrease from 61.9% in the same quarter last year. Zooming out, however, PubMatic’s full-year margin has been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

PubMatic was roughly breakeven when averaging the last year of quarterly operating profits, mediocre for a software business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, PubMatic’s operating margin decreased by 3.4 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. PubMatic’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, PubMatic generated a negative 18.6% operating margin. The company's consistent lack of profits raise a flag.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

PubMatic has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9%, subpar for a software business.

PubMatic’s free cash flow clocked in at $7.3 million in Q1, equivalent to a 11.4% margin. The company’s cash profitability regressed as it was 12.9 percentage points lower than in the same quarter last year, but it’s still above its one-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

Over the next year, analysts predict PubMatic’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 9% for the last 12 months will increase to 24.6%, giving it more flexibility for investments, share buybacks, and dividends.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

PubMatic is a well-capitalized company with $144.1 million of cash and $44.89 million of debt on its balance sheet. This $99.24 million net cash position is 20.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly PubMatic blew past analysts’ EBITDA expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its EBITDA guidance for next quarter missed significantly. Zooming out, we think this was a mixed quarter. The stock traded up 2.4% to $11.25 immediately after reporting.

Updated: May 22, 2025 at 10:18 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in PubMatic.

We see the value of companies addressing major business pain points, but in the case of PubMatic, we’re out. For starters, its revenue growth was weak over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its forecasted free cash flow margin suggests the company will have more capital to invest or return to shareholders next year, the downside is its gross margins show its business model is much less lucrative than other companies. On top of that, its declining operating margin shows it’s becoming less efficient at building and selling its software.

PubMatic’s price-to-sales ratio based on the next 12 months is 1.8x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $15.50 on the company (compared to the current share price of $11.77).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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