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Kubient (KBNT) is a cloud-based software platform for digital advertising. It is a relatively new company founded in 2017 by Paul Roberts and went public through an IPO last August. The company’s main product is its audience marketplace and its patented ad-fraud prevention technology KAI. The audience marketplace for programmatic advertising allows advertisers and publishers to bid in real-time through the cloud. Whereas KAI allows advertisers and publishers to detect ad fraud in real-time prior to bidding to tackle the fast-growing ad-fraud problem in the digital advertising industry.
Unlike other major programmatic advertising companies like The Trade Desk (TTD), Magnite (MGNI), PubMatic (PUBM), and AcutiyAds (ATY), Kubient prioritises on helping companies prevent ad fraud. Ad fraud is one of the biggest problems in the digital advertising industry and it is spreading quickly. According to Kubient, it was estimated that Ad-fraud could account for losses between $19 and $42 billion and every 20% of every advertising dollar is wasted because of it. A lot of companies are frustrated as a large portion of their advertising budget went to bots and are not able to reach their target audience. Research shows that digital advertising executives are seeking more insights for their advertising spend and over 50% of advertising professionals believe the industry has not done enough to stop ad fraud. This is why Kubient decides to tackle the problem by building its own Ad-fraud prevention software KAI. KAI is able to identify and block false requests in real-time while the auction is happening automatically as it has a best in class 5 milliseconds latency only. Also, its AI feature allows it to recognise more and more fraud as it goes through more requests over time. Comparing KAI to other competitor’s offerings, KAI offers a much larger coverage and a shorter pre-bid latency that allows it to catch the fraud in almost real-time.
Set up for growth
Kubient went on a hiring spree lately to expand its management team rapidly. Two note-worthy appointments are Leon Zemel as chief product officer and Kimberly Kahn as VP of people’s operation. Both Leon and Kimberly are former DoubleVerify (DV) employees and veterans with experiences like them being able to come onboard to a young company prove the attractiveness of Kubient’s prospect. Also, the latest hire of Mike Gavigan and Mark St.Armour to the sales team help brought clients such as Lands’ End, Hearst, theSkimm, Enfamil, Leo Burnett, and Domino’s Pizza to Kubient’s portfolio of partners. This is really big because on the last earnings call CEO Paul Roberts stressed that they’re satisfied with their number of publishers right now but they need more advertisers, therefore being able to grow the sales team and bring in blue-chip partners such as Domino’s Pizza is certainly a big step in the right direction. As a small company with a market cap of around $80 million, Kubient ended the latest quarter with a cash balance of $32.5 million. This allows the management team to pursue M&A activities when there is a suitable target. KAI is a game-changer in the industry if it succeeds as it brings capabilities such as AI pre-bid fraud prevention with minimal latency which no other company is able to do at the moment. The success of KAI will attract companies to switch from its old DSP and SSP company to Kubient which will allow the company to grow exponentially. One of the under-looked growth avenues for Kubient is its DOOH (digital out of home) infrastructure marketplace. Its partnership with Zoox Smart Data allows it to reach unique high-value captive audiences in hospitality and transit locations and when accessing wi-fi and content portals at Choice Hotels, the New York MTA transit system, and airports. This gives an advantage for Kubient not to only allow advertisers to advertise on phones, computers, and smart tv but also outside at smart connected infrastructure throughout the city.
Financials and Valuation
The company grew 400% in the latest quarter excluding the one-time recognition of $1.3 million in revenue from its KAI beta testing last year. One of the takeaway from the latest quarter is that there are 14 trials and audits being scheduled which proves the attractiveness of KAI. The part where I am a bit concerned is that the number of Publisher inventory that Kubient can monetise increased only 28% from Q4 to Q1 compared to the 874% from Q3 to Q4 last year which is showing a slowdown in growth and the number of total publisher partnerships also only increased 5% which is quite disappointing. After the drop from the peak in February, Kubient current share prices trades at a very attractive FWD 22 price to sale (P/S) ratio of 4.7. The major competitor in the space such as Trade Desk (TTD), Magnite (MGNI), PubMatic (PUBM), and AcutiyAds (ATY) trades at a FWD 22 P/S ratio of 24.8, 9.3, 8.8, 4.8 respectively, these companies are growing at around 30% on average for 2022 whereas Kubient is forecast to grow at over 100% which is a much higher growth rate. It is worth noting that all these companies are a lot more established compared to Kubient but I think the valuation gap will close once Kubient proves that KAI is the best in class ad-fraud prevention software and is able to prove that it can maintain its rate of growth in the long run. I believe this is possible as the programmatic advertising market, ad-fraud market, and DOOH market are growing rapidly which will provide a massive tailwind for Kubient going forward.
It is worth noting that Kubient heavily relies on one product which is KAI. If KAI did not perform as it claims itself to be then Kubient will lose its only moat instantly. Also, the integration of KAI only began not so long ago therefore it is hard to know whether companies are interested in the product. The audits or trials, being scheduled by prospective customers are currently 14 and it will be important to see how many customers can they add moving forward. Kubient might also face more competition as other larger advertising companies start to invest in their own Ad-fraud product offering. It is also worth knowing that this is a really volatile stock given its low float and lack of institutional holdings. One of the more alarming risks from its latest quarter report is that G&A expense increased almost 150% yet the expense for technology development remains flat and stock is compensation also increased from $16,125 in 2020 to 238,638 in 2021. This indicates that the company is not that invested in its technology in the last quarter yet salary and compensation increased significantly which I believe is not justified and I will be monitoring these numbers going forward.
This is a small company but I believe they are poised to be much bigger in the long run. I really like the fact that they are more focused on the Ad-fraud space where there is less competition and KAI is the crown jewel of the company with unmatched capabilities in the ad-fraud space. The CEO is doing a great job growing the management and sales team, and the launch of KAI is starting to pick up some steam which I believe we will see a lot of new customers adopting the KAI software. The company also just got included in the Russell microcap index which is a validation and I believe a lot more institutions will start to notice this fast-growing gem soon. Although there might be risks and execution problems but overall I think the valuation at the current price is just too low to ignore. I believe a FWD 22 price to sale (P/S) ratio of 20 will be fair which puts the share price at around $30 a share which represents a 400% upside.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2021 felix fung