Advertising technology company Perion Network (NASDAQ:PERI) has seen its stock rise by over 30 percent in the early weeks of 2023. In large part, this sudden spike appears to be due to a business connection between Perion and the increasingly popular ChatGPT AI chatbot.
Investors must now answer whether there is still value to be found in Perion or if the stock has risen above a reasonable price.
Perion is a digital advertising network focused on the use of AI and machine learning technologies to improve the traditional marketing funnel. According to the company, its network of search, social and video advertising channels gives it access to a nearly $300 billion market of potential consumers.
One of Perion’s key innovations is its cookie-free targeting. This system offers enhanced consumer privacy protections while, according to the company, providing better results for advertisers. This targeting system includes real-time behavioral predictions that can help to optimize ads based on a viewer’s current activities.
Perion is also a strategic advertising partner for Microsoft. This partnerships centers on Perion’s CodeFuel project and its potential to enhance Microsoft’s market share in search advertising.
Perion Video Revenue Up 209%
In Q3, Perion Network reported a 31 percent increase in revenue year-over-year. Search advertising revenue rose 38 percent, while display advertising revenue rose 26 percent. Within the display category, video revenue increased by an astonishing 209 percent.
The good news for Perion wasn’t confined to revenue, as GAAP net income also rose by 141 percent over the previous year. Earnings were reported at $0.54 per share, beating analyst expectations by $0.03. This was the latest in a string of earnings beats that goes back to 2019.
Over the next 3-5 years, analysts expect Perion’s earnings to continue growing at a compounded rate of 25 percent annually. The company is also expected to increase its operating cash flows by nearly 75 percent over the next year. These growth numbers do support a value argument for Perion, though that argument would have been stronger before this year’s sudden price jump.
Among Perion’s many strong points is its excellent margin. The company reported a margin of 41 percent on its media advertising in Q3, up from 39 percent the year before. The company’s return on equity is a less stunning but still respectable 16.45 percent.
The surge in Perion’s stock price recently is closely tied to a hotly anticipated source of growth, namely ChatGPT. The new AI system’s search capabilities are expected to significantly enhance Microsoft’s Bing platform.
In a best-case scenario, Bing could even become a viable challenger to Google in the search world. Because Perion is partnered directly with Bing for search advertising, this development would naturally bolster the ad company’s revenues and earnings.
Fair Value Above PERI Share Price
Over the coming year, analysts have pegged fair value at $35 per share, about 4.4 percent above its current trading price.
Many of the current price targets were issued before the surge in share prices that has taken place in recent weeks. As such, it appears that Perion has already realized much of its initially projected upside for the year.
Perion does maintain a strong buy rating from analysts, with five of the six outstanding ratings recommending the stock as a buy. The final rating categorized Perion as an outperform, contributing to unanimously bullish coverage from professional analysts.
Will ChatGPT Save Bing and Disrupt Alphabet?
The most obvious risk factor associated with Perion Network is the fact that the stock could be overpriced if ChatGPT proves to be overhyped.
Many experts believe that the AI chatbot, while seemingly impressive, is being blown far out of proportion. Given Google’s nearly unassailable dominance over Bing in the search market, banking on ChatGPT to unseat the world’s most popular search engine seems a bit far-fetched at this nascent stage.
Related to this risk is the possibility that investors could lose money on Perion as the hype around ChatGPT subsides. It’s relatively common for stocks to rise on enthusiasm for new technologies and then fall when the reality of those technologies sets in. While Perion’s organic growth rates in revenue and earnings are impressive, they may not be enough to save the stock during a ChatGPT-related selloff.
Perion may also lack a robust moat. While the Bing partnership certainly gives the company some protection from competitors, the technology Perion relies on is becoming increasingly widespread and accessible. As such, it’s far from difficult to imagine competition for advertising dollars slowing down the company’s future growth.
Is Perion Network Stock a Buy?
Perion Network’s potential as an investment seems to be closely tied to the future of ChatGPT. With the stock having surged so far this year, the company will have to continue growing quite rapidly to make good sense from a value perspective.
The ChatGPT problem notwithstanding, Perion appears to be a strong company that could have a bright future ahead of it. With excellent growth, high margins and strategic partnerships that will likely support it for several years, Perion is making several moves in the right direction. The company has also managed to remain debt-free, a fact which could help it through the current macroeconomic climate.
Ultimately, Perion appears to be a good buy for investors who are bullish on AI and particularly ChatGPT. While the stock has spiked, it doesn’t appear to be terribly overvalued. Assuming a few more years of robust growth, the company could reasonably justify its current pricing.
Investors who are more skeptical of the AI revolution, however, may want to hold on Perion. While the company is still sound, there’s a decent chance that a pullback from AI-related enthusiasm could present a better buying opportunity at some point in the future. It should be noted that such a pullback would likely have little to do with the company’s fundamentals, which appear to be quite strong.
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