It’s April – for many this means the start of a new quarter and an opportunity for investment firms to change their playbooks. Tech stocks, for example, have fallen out of favor and been battered for much of the past two quarters. Could this be the start of their recovery?
Three tech stocks I have my eye on right now are The trading post (TTD -1.12% ), PubMatic ( PUBM -5.04% )and Autodesk ( ADSK -1.23% ). Each member of this trio bucks the unprofitable trend often seen in the industry and is all profitable based on GAAP (Generally Accepted Accounting Principles). Even though tech stocks aren’t recovering quickly, they all look like solid long-term investments.
The trading post
The Trade Desk and PubMatic are both involved in digital advertising, but at opposite ends of the market. Companies that want to advertise their products can purchase ad space through demand-side platforms. Companies with advertising space for sale, such as connected TV platforms, podcasts or websites, find buyers through supply-side platforms. The Trade Desk operates on the demand side, while PubMatic works on the supply side.
The Trade Desk offers tools such as Measurement Suite and the Koa artificial intelligence engine that work to guide ad campaigns with data. Using the feedback these programs provide, clients can optimize their ad spend and associate specific sales with ad areas so they know which ads are working and which aren’t.
While ad spend was hit in 2020 due to economic uncertainty, it rebounded in 2021. The Trade Desk took advantage of this surge: its revenue grew 43% last year to around $1.2 billion, and its adjusted EBITDA increased by 77% to $502.7 million. However, due to a one-time award of $158 million in stock-based compensation to CEO and founder Jeff Green for his long-term performance, GAAP operating expenses increased, which resulted in lower earnings per share.
The Trade Desk received many accolades last year, including Adweek Reader’s Choice Best of Tech Award for its demand-side platform and a leading position in Gartner‘s Magic Quadrant for Ad Tech, with the highest score in the space for “completeness of vision”. With The Trade Desk, investors can be sure they are buying a top notch company.
On the supply side, PubMatic enjoys a particular advantage over many of its competitors: rather than outsourcing its cloud infrastructure, PubMatic has built its own. This approach has multiple advantages, such as specialized solutions and higher margins.
Connected TV (CTV) has driven significant growth for PubMatic: in the fourth quarter, Connected TV revenue grew more than 500% year-over-year. During 2021, the company’s overall revenue grew 53% year-over-year to $227 million. PubMatic’s GAAP net income margin was 25% for the year, comparable to margins at some more established technology companies. Management expects revenue growth of around 25% in fiscal 2022, hoping to bring in $286 million.
While The Trade Desk is recognized as the leader on the demand side, PubMatic is engaged in a battle for supremacy on the supply side with magnite. At $468.4 million, Magnite’s revenue in 2021 was nearly double that of PubMatic. But I believe PubMatic’s internal infrastructure offers significant technological advantages that will allow the company to more than catch up to its competitor. For proof, take a look at PubMatic’s cost of revenue per 1 million ad impressions, which has dropped almost 50% over the past two years, from $1.12 in Q1 2020 to $0.57. in the fourth quarter of 2021. At the same time, PubMatic has significantly increased client results, increasing the number of ad impressions from 28 trillion in 2019 to 92 trillion in 2021. All of this has given PubMatic the opportunity to adjust its prices while maintaining its margins.
Between the two, there is a lot of advertising space on the Internet. But considering it trades at just 26 times earnings, PubMatic stock is a bargain.
Engineers and architects interact with Autodesk software almost every day. This essential product enables the creation of plans, digital renderings and mechanical designs of many buildings and products. Without Autodesk’s contributions, many industries could not function, giving it the enduring status of a vendor that must be paid for in good times and bad.
In terms of age, Autodesk is much more mature than The Trade Desk or PubMatic. As a result, its growth numbers aren’t quite as flashy. Still, its 2022 fiscal year (which ended Jan. 31) was strong, with billings up 16% to $4.82 billion. Additionally, Autodesk is a cash-generating machine with a free cash flow (FCF) margin of 34%.
Management’s forecast for fiscal year 2023 was optimistic, with billings expected to increase 23.5% mid-term and FCF margin expected to reach 43%. With all this cash coming in, management intends to be opportunistic with its stock buyback program and offset the dilution created by its stock compensation plans.
For 32 times FCF, you can own a business that provides a vital product to its customers and grows at an annualized rate of more than 20% per year. Autodesk is pretty much a no-brainer investment at these prices.
With all three stocks down at least 35% from their highs despite strong trading prospects for the year ahead, investors are likely to jump to buy shares of three major companies in April. These stock sale prices may not turn around instantly, but as each company continues to succeed, stocks will eventually follow.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.