Taboola (TBLA)

Content discovery platform Taboola (NASDAQ:TBLA) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 3.3% year on year to $427.5 million. On top of that, next quarter’s revenue guidance ($448 million at the midpoint) was surprisingly good and 177% above what analysts were expecting. Its non-GAAP profit of $0.08 per share was significantly above analysts’ consensus estimates.

Company Overview

Often appearing as those "You May Also Like" or "Recommended For You" boxes at the bottom of news articles, Taboola (NASDAQ:TBLA) operates a digital platform that recommends personalized content to users across publisher websites, helping both publishers monetize their sites and advertisers reach target audiences.

The sector is on the precipice of both disruption and growth as AI, programmatic advertising, and data-driven marketing reshape how things are done. For example, the advent of the Internet broadly and programmatic advertising specifically means that brand building is not a relationship business anymore but instead one based on data and technology, which could hurt traditional ad agencies. On the other hand, the companies in the sector that beef up their tech chops by automating the buying of ad inventory or facilitating omnichannel marketing, for example, stand to benefit. With or without advances in digitization and AI, the sector is still highly levered to the macro, and economic uncertainty may lead to fluctuating ad spend, particularly in cyclical industries.

Taboola's main competitors include Outbrain (NASDAQ:OB), which offers similar content recommendation services, as well as major digital advertising platforms like Google (NASDAQ:GOOGL), Meta (NASDAQ:META), and other native advertising networks such as Nativo and MGID.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $1.78 billion in revenue over the past 12 months, Taboola is a mid-sized business services company, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, Taboola grew its sales at an impressive 9.6% compounded annual growth rate over the last five years. This shows it had high demand, a useful starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Taboola’s annualized revenue growth of 13.8% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Taboola reported modest year-on-year revenue growth of 3.3% but beat Wall Street’s estimates by 2.5%. Company management is currently guiding for a 4.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 61.1% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and suggests its products and services will face some demand challenges.

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Taboola was profitable over the last five years but held back by its large cost base. Its average adjusted operating margin of 4.8% was weak for a business services business.

Looking at the trend in its profitability, Taboola’s adjusted operating margin decreased by 2.3 percentage points over the last five years. 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. Taboola’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.

This quarter, Taboola generated an adjusted operating profit margin of 2.2%, up 2.6 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Taboola’s full-year EPS dropped 173%, or 28.6% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Taboola’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, Taboola reported EPS at $0.08, up from $0.01 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Taboola has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging an eye-popping 425% over the last five years.

Taking a step back, we can see that Taboola’s margin dropped meaningfully during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

Taboola’s free cash flow clocked in at $36.07 million in Q1, equivalent to a 8.4% margin. This result was good as its margin was 2 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Taboola historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.1%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Taboola’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

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

Taboola is a profitable, well-capitalized company with $216.4 million of cash and $213.5 million of debt on its balance sheet. This $2.95 million net cash position 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 Taboola blew past analysts’ EPS expectations this quarter. We were also glad its revenue guidance for next quarter trumped Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 4.2% to $3.19 immediately following the results.

Updated: July 8, 2025 at 12:19 AM EDT

Before investing in or passing on Taboola, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Taboola’s business quality ultimately falls short of our standards. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Taboola’s EV-to-EBITDA ratio based on the next 12 months is 7x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $4.13 on the company (compared to the current share price of $3.70).