Is This Small Digital Advertising Stock Primed to Take Off?

The world of advertising is changing. We don’t need fancy charts and graphs to tell us that connected television (CTV), video, and search are indispensable to advertising companies.

In the last Nielson report, CTV drew its largest market share yet, further encroaching on broadcast and cable television. Because of this, a burgeoning digital advertising industry has developed featuring a host of small firms jockeying for supremacy — or at least a piece of an enormous pie. Perion Network (PERI -1.65%) is quietly establishing itself as one that investors should be watching.

So what exactly do we mean by CTV, video, and search? CTV refers to any television that is accessed over the internet. So when we say CTV, think Netflix or Disney+. For examples of video advertising, consider ads associated with videos on Meta‘s Facebook. And we all probably know what search advertising is, with Alphabet‘s Google Search dominating and Microsoft Bing being the second most popular.

Perion is diversifying its offerings

Search advertising is highly effective, and companies pay big money to feature their ads. Often, people are directly looking to buy when they search for products. For instance, let’s say you are an investor watching an online video about stocks. A targeted ad comes on for one of the top brokerage sites. But we already have a broker, so even this highly targeted ad only reaches a few buyers. However, if we search directly for “the best brokerage for new investors,” we’re likely ready to buy.

Perion has a lucrative search partnership with Microsoft, which accounts for a significant chunk of its sales. This contract was renewed in late 2020 for four more years and stretches back to 2010. Search advertising accounted for 45% of Perion’s total sales in 2021.

One of Perion’s recent search innovations is its patented SORT technology, increasing targeting without third-party cookies. With third-party cookies on the way out, tech like this will be critical to advertisers.

The Microsoft partnership is excellent for Perion, but management knows it must diversify. Too much reliance on one partnership is risky. Perion is making a major strategic push into CTV and video, collectively “display advertising.” As shown below, Perion’s display revenues have seen explosive growth recently and now account for 55% of its sales.

Data source: Perion. Chart by author.

Since Perion has a foothold in each market, its customers can shift advertising dollars from one basket to another without leaving the platform. This is one reason Perion’s growth is accelerating. Its sales grew 40% year over year in the first quarter of 2022 versus 36% over the prior year in Q1 2021.

Perion is GAAP profitable and undervalued

Perion separates itself from many growth stocks because it is GAAP (generally accepted accounting principles) profitable and has been for years. As seen below, net income and earnings per share (EPS) made a big jump in 2021.

Perion Network selected financial results

Data source: Perion. Chart by author.

Perion is also conservative when it comes to managing its assets. The company has $437 million in current assets and just $163 million in current liabilities as of Q1 2022. Perion has made several strategic acquisitions over the years, such as the recent addition of Vidazoo, and the strong balance sheet will allow this to continue.

Perion’s stock hasn’t garnered a premium valuation. This may be the result of risks associated with being a small fish in a big pond, or perhaps because the company is relatively unknown. In any event, the price-to-earnings (P/E) ratio is under 15 and attractive when placed next to other digital ad-tech stocks, as shown below.

PERI PE Ratio Chart

PERI PE Ratio data by YCharts.

The stock made a significant move up in late 2020, going from well under $10 per share to the $20 per share range, near where it sits today. If management can continue the company’s impressive performance and weather a likely upcoming economic slowdown, this stock could be ready to take another significant leg up.

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