Outbrain Inc (NASDAQ:OB) is one of the largest clickbait advertising companies in the United States. You likely have seen its ads while browsing media sites, where it displays links to often-low-quality articles and editorials offering to help you lose fat, get rich, and improve your life.
Investors seem cold on the company since its July 23, 2021 Nasdaq IPO, suppressing the stock price. But is Outbrain stock undervalued?
However you may feel about native advertising, it’s a booming market, especially in North America. The $92.53 billion U.S. digital display ad market is expected to grow to $107.91 billion over the next two years.
That’s not all going to companies like Outbrain though; there are thousands of advertising platforms. And there are huge tech whales in those waters, like Google (NASDAQ:GOOGL), Facebook (NASDAQ:MVRS) and Microsoft (NASDAQ:MSFT).
Let’s pick Outbrain to determine if it will click with portfolio IQs or bait investors into scratching their heads with confusion and regret.
Outbrain Serves 60,000+ Sites
Outbrain is a New York City-based web recommendation platform that specializes in what are known as chumbox (or chumbucket) ads.
The term references how fishermen use bits of dead fish as bait. It’s a market leader alongside Taboola.com (NASDAQ:TBLA). The two companies were in talks for an $850 million merger before the pandemic hit.
Besides that failed merger, Outbrain grew since its 2006 founding through a series of mergers and acquisitions. These decisions focus on the company’s core native advertising business and include disciplines like content recommendation and curation, along with predictive analysis.
Outbrain is embedded into over 60,000 websites, including Sky News, Sidney Morning Herald, iHeart, and Veterans United. It provides a wealth of information to publishers, but it does face criticism in the modern age of combatting fake news.
It’s doing its best to pre-filter spammy links, although what’s considered “spam” could be a moving target for eternity.
How Outbrain Makes Money
Outbrain’s business model is based on cost-per-click (CPC – the amount advertisers pay to display their ads) and pay-per-click (PPC – the amount it pays publishers for displaying ads on their page). The Verge is one of Outbrain’s publishers, and it has a great article outlining chumbox advertising.
Media outlets use these ads because they often pay more than the revenue-per-thousand (RPM – the amount paid to publishers for display ads) model used by companies like Google Ads. And the media is being crushed by platforms like Google and Facebook, meaning they often have no choice but to rely on CPC ads.
The reason they work so well is because they blend in with the rest of the content. A banner ad in the header, sidebar, or even within the content can stick out as an obvious advertisement. But these chum ads are more subtle – despite being labeled as sponsored content, the focus is still on the content.
Whether we want to admit it or not, somebody’s definitely clicking these ads. That helped it earn over $767 million in revenue last year, a nearly-12 percent increase from the prior year’s total.
Outbrain Financial Outlook
Outbrain’s revenue is growing, but so are the company’s traffic acquisition costs (TAC), which increased 11 percent in 2020 and 36 percent in the first half of 2021.
That is helping the company maintain overhead costs and generate a $4.4 million net profit from the top line sales of $767 million. That’s an improvement over the -$20.5 million net loss in 2019.
The company expects to continue inching its gross profit up for the remainder of the year to land around 39 percent. This could cause a full-year revenue increase of 30 percent that should provide investors with healthy returns.
However, its stock price isn’t yet reflecting these tailwinds, because the market is still cold on the ability for display advertising companies to grow.
Is Outbrain Stock a Buy?
Although it operates in a controversial niche, Outbrain is still working with a lot of reputable media outlets and companies. It’s not as risky as a vice industry like cannabis or gambling, and it continued showing growth on all fronts.
This has all the makings of a solid long-term growth play under $1 billion, as the company continues its focus on maintaining a reputable product. And although the pandemic tightened advertiser’s purse strings, Outbrain’s growth isn’t at high risk of waning during the recovery.
It’s one of few leading advertising platforms able to compete in a world dominated by giants like Google and Facebook. Of course, no investment is ever perfectly safe, and there’s still plenty of risk for Outbrain investors.
Headwinds Facing Outbrain
Advertising is a technological arms race with consumers looking to browsers and extensions to block it out. Meanwhile, platforms like Outbrain must find ways around those blocks to continue displaying “content/ads”. And the value could be diminished by cookie and privacy changes to iOS and Google Chrome.
Without tracking cookies, Outbrain faces major hurdles in its ability to ensure content is well-suited for the end user. That could ultimately make it less profitable and put it in danger of losing the ground it gained against the tech giants in the space.
Is Outbrain Stock Undervalued? The Bottom Line
Outbrain is an in-feed content advertising platform that blends seamlessly into media outlets and other digital properties. This is a less intrusive method of advertising that’s under fire in the age of fake news and misinformation. That makes it a controversial platform in an industry dominated by tech industry titans.
However, it continues to grow in a crowded market because it provides a necessary service. Advertisers are willing to pay more for quantifiable engagement through these means, and publishers need money as they get shaken down by big tech too.
This makes Outbrain a solid investment for those seeking a position in the growing digital display advertising market.
Crunching the numbers, OB share price has upside potential of 48% based on a discounted cash flow analysis forecast.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.