AdTheorent: Foolishly Trading Under Book Value

Summary:

• AdTheorent, a digital media and advertisement company, is currently trading at all-time lows.
• Despite a profitable operating business, the market is pricing AdTheorent lower than its tangible book value.
• With no debt and ample cash for growth, ADTH presents a reasonable small-cap investment opportunity with limited downside potential.

AdTheorent (NASDAQ:ADTH) is a digital media and advertisement company that is currently trading at all-time lows. With a history of solid, profitable growth, no debt on the balance sheet and plenty of cash to fund further growth, I believe that at current prices ADTH is a reasonable small-cap buy with small downside and decent upside.

The company

Founded in 2012, AdTheorent is a digital media platform which focuses on performance-first, privacy-forward methods to execute programmatic digital advertising campaigns, serving both advertising agency and brand customers. (Source: AdTheorent)

AdTheorent is providing advertising solutions for business clients to allow them to better target their audience and gain valuable insights about user behaviour. The company is using machine learning to allow advertisers to use their solutions while preserving the privacy of the end user. With governments and companies putting a higher emphasis on privacy regarding digital tracking solutions, AdTheorent can offer a more privacy-preserving alternative for digital tracking in some instances.

Using the power of machine learning, the company is claiming to provide their clients with higher conversion rates, more precise targeting and better retargeting capabilities.

A further look into AdTheorent’s different solutions can be found on the website. For our purpose, this high-level overview of what the company is doing should be enough, so I won’t be going into it further for now.

Why is the market pricing AdTheorent lower than book value?

Different macroeconomic fears are creating uncertainty for the advertising market, affecting stocks in the advertising industry. While the S&P 500 Advertising Sub-Index is standing at a -11% return YTD, many smaller cap names in the advertising industry suffered much more.

Some of the concerns are the highly cyclical nature of advertisement. Ad spending is probably one of the first things companies are cutting in an economic downturn. With many being pessimistic about the economy, there is a perceived risk of a decline in revenue for the advertising revenue.

Besides the SPAC, which we will cover later in the article, there are other reasons why AdTheorent specifically is trading so low, besides the overall industry pessimism.

Sitting at a market cap of ~$107m, AdTheorent is considered a Micro-Cap stock. Micro-Cap stocks are generally more volatile and suffer more on industry downturns. Being too small a company to be considered by most institutional funds, there is also little institutional interest. Retail interest too is small for AdTheorent, since the stock is relatively little known, being positioned in a “boring” industry and being a B2B player.

The SPAC

In December 2021, AdTheorent went public with an SPAC merger. The company raised ~$80m of net proceeds in the process and stocks started trading on December 23, 2021 at around 10$ a share.

At ~10$ a share, AdTheorent went public in December 2021 at a market cap of ~$850m, representing a P/E of ~33.5 and an EV/Sales of ~19.3 at that time. Being able to bank on both the SPAC hype and the AI hype, AdTheorent was able to go public at that price, which I consider inflated.

With 2020 and 2021 marking the peak of the SPAC hype the market has experienced over the last couple of years, there has been a lot of pessimism about SPACS since 2022. With the IPOX SPAC index being down about 40% from its 2021 highs, most companies that went public with an SPAC merger have underperformed the market by a wide margin.

Nowadays, companies that went public with an SPAC are in risk of being associated with the majority of other SPAC companies that were overvalued when going public, putting pressure on SPAC companies as a whole.

The inflated starting price combined with the general downturn for SPACs and perceived risks for the advertising industry caused AdTheorent’s stock prices to plummet. The stock is currently sitting at ~1.2$, representing a decline of ~88% from the initial price and a negative year-over-year return of ~36%.

Undervalued and profitable

The global digital advertising revenue as a whole is expected to grow at 13.9% CAGR until 2030. While AdTheorent managed to grow steadily over the past few years, they experienced slowing growth lately. 2022 revenue was only up 0.4% compared to 2021. Also, with revenues in 2023 so far showing year-over-year declines, AdTheorent is still forecasting slight revenue growth in 2023 compared to prior year.

With AdTheorent’s self-service platform posting a quarter-over-quarter revenue increase of 75% in Q2 2023 and their Health service posting a year-over-year growth of 36%, some of their services are growing rapidly.

Even in an environment of macroeconomic fears, the company is still managing to stay profitable, posting a Net Income of $8.1m in Q2, 2023. The company is forecasting an EBIDTA of around $26.5m on the low-end for 2023, after posting an EBIDTA of $22.3m in 2022. Based on the 2023 outlook, the company is currently sitting at an Price-to-EBIDTA of ~4 and Price/Sales ~0.65. Forecasting a Price-to-EBIDTA of 10, there could be an upside of ~2.5x for AdTheorent’s common stock, even without any bottom-line improvements. I couldn’t use Enterprise Value for any of the estimations, since the Enterprise Value right now is 0, factoring in current assets as cash.

With 0 debt on the balance sheet and tangible equity of roughly $115m, at current prices you are buying the company’s assets at a slight discount while getting the operative part of the company basically for free. The company also holds ~$73m of cash ready to either distribute to shareholders or fund future growth.

Based on several awards the company has won and a history of growth, AdTheorent’s ML products could provide an even higher upside in the future. Based on the hard numbers, however, AdTheorent seems to be a reasonable buy even with slowing growth.

What to look out for

Basically, for the next couple of quarters, I am looking out for any surprises. If the company continues to operate at current levels without any big changes, I will stick to my buy rating. Showing strong top-line growth over the next quarters and/or announcements of capital return to stockholders could further strengthen my buy rating.

Especially the results for Q4 2023 will be important, as those months usually are by far the best for advertising companies. Having the full year results, it will also be interesting to see, if the company will propose share repurchases.

If the company shows a further decline in growth or even negative growth, I would start considering changing my rating to hold or sell. At some point, even if a company is trading at below book value, there is simply a risk that the gap will never close. This is especially true, if the company starts burning cash.

Conclusion

In conclusion, AdTheorent seems to be a reasonable buy at current levels, due to the extremely low valuation. The company seems to be trading at this level not because of fundamental issues, but likely due to being a Micro-Cap stock that is very little known, combined with pessimism surrounding SPACs and the advertising industry as a whole.

It could also take a long time for the market to notice this asymmetry or for the company to do something about it. The timeline to achieve returns with the common stock is thereby unknown. Since this stock is a Micro-Cap which also hasn’t been trading for too long, there is also an increased amount of attention needed as dynamics may quickly change.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of ADTH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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