An early pioneer in advertising, John Wanamaker once said, “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” In today’s world of digital and programmatic advertising, content is created at a rapid and growing pace, driven in large part by the exponential growth of social media and video, adding new dimensions to trust in the marketing world. Advertisers are increasingly focused on brand reputation and they want to ensure that their ads appear in contexts that match their values, and also that they’re seen by eyeballs and not algorithms!
On this week’s pod, we deep-dive another potential hypergrowth stock, Integral Ad Science (IAS), one of the emerging leaders in ad viewability, ad fraud, and ad safety and suitability.
- Founded in 2009 and IPO’d on 30 June 2021 at a valuation of $3.3B. They have grown rapidly to 600 employees. Insider ownership is low at 1%, and a 70% controlling interest is still held post IPO by Vista Equity Partners, a US private equity investment firm who have other investments in the ad-tech space.
- Based on a March 2021 analysis by Frost & Sullivan, the global market opportunity for ad verification solutions is $9.5 billion (growing at a 16.2% CAGR), and the global market for ad measurement and effectiveness solutions is $6.3 billion (growing at a 20.5% CAGR).
- eMarketer estimates that the global non-search digital advertising market surpassed $180 billion in 2020, and will grow to over $270 billion by 2023. Marketers are increasingly aware of wasted media spend related to ad fraud (for example, when ads are served to bots or non-human traffic instead of real people) or viewability issues (for example, when ads are served but cannot be viewed by a person). Juniper Research estimates advertisers will lose approximately $100 billion in annual ad spend to ad fraud in 2024, an increase from approximately $42 billion in 2019.
- Powered by artificial intelligence, IAS’s solutions identify non-human traffic by automatically detecting new threats and uncommon patterns, however, there is justified scepticism by experts around the effectiveness of IAS’s technology, although these claims apply equally to their competitors – and to some extent, digital marketing companies have few options if they want to protect, or at least to be seen to protect, their customers’ ad investment.
- With over 2,000 customers, IAS are one of the more dominant providers in their market. Between 2018 and 2020, their average revenue per customer for their top 100 customers has grown at a CAGR of 22%. In 2020, Twitter announced new partnership agreements with Integral Ad Science and a competitor, DoubleVerify, to provide advertisers with increased assurance around the placement of ads on a Twitter timeline, safeguarding against potential brand association with controversial content.
- IAS’s total revenue for 2020 was $241M a modest increase of 12.7% YoY. Dollar-based net retention rate reduced from 112% to 108%, but this may be a consequence of deferred advertising spend during H1 2020 due to the pandemic.
- IAS are operating at the intersection of a number of trends in the ad industry: programmatic ads, connected TV, social media, ad safety, consumer privacy and the localisation of global brands. IAS is an early-stage investment opportunity with significant growth potential however, investments of this type come with significant inherent risks. A basket approach of buying several companies in the same area may be a prudent investment strategy.
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Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Monday the 12th of July.
Luke: Welcome to the Telescope Investing podcast.
Intro
Luke: Albert, it’s been a couple of weeks since we’ve taken a look at our hyper-growth stock and you know what’s ringing in my ears? The fact that we both missed out on Trupanion just a month ago and they’re up nearly 50% since then.
Albert: And to make it even worse, the two stocks that we did pick, CuriosityStream and Nanox Imaging, are both down, quite a lot, actually.
Luke: Well, we always knew these were going to be highly volatile, highly speculative picks, but it feels a shame that we’ve picked the two dogs and we’ve missed out on the winner.
Albert: The actual dog stock Trupanion.
Luke: Exactly, yes! Well, let’s roll the dice again today and let’s take a look for another hyper-growth opportunity.
Albert: You sent out a request on Twitter asking for suggestions and we’ve got some interesting ones.
Luke: We did. Let’s run through a few of the ideas that were suggested. Corey on Twitter suggested a company called Nova Measuring Systems, NVMI, who do advanced process control in semiconductor manufacturing. I actually really liked this sector. I don’t know a huge amount about it, so we’re not going to do it today, but maybe we should come back to this one in the future.
Albert: Yeah, this could be really interesting considering that chips are in short supply at the moment. Adventures from Financial Independence on Twitter suggested Docebo, which is a learning management system, but we already looked at Kahoot last year and we have CuriosityStream in the portfolio. And in general, educational software isn’t really an area that either Luke or I are that interested in.
Luke: I had a really interesting chat with Byron on Twitter. We were chatting in the DMs for a bit. He recommended AST SpaceMobile (ASTS) which is kind of cellular phones from orbit. Byron’s bullish on this, but I’ve got to say I’m pretty sceptical given the key competition that’s arising in Starlink.
Byron made a really good point that AST’s technology doesn’t need Starlink ground stations. It’s basically phones connecting directly to low earth orbit satellites, but I got to think that that’s just an engineering problem that Elon Musk is going to crack. He’s going to reduce the size and the power requirement of a Starlink base station. And at that point, there’s no way anyone can compete with Starlink and the free orbital capacity that they get by piggybacking SpaceX.
Albert: It seems like you believe that Elon Musk will solve every single problem on Earth.
Luke: And Mars, Albert, and Mars!
Albert: And Matt on WhatsApp suggested Genius Sports, which I believe deals in online gambling. And this is an area with a lot of hype at the moment, and companies like DraftKings have done really well over the last year. I believe DraftKings has almost 5x since the beginning of 2020, but personally, I believe that online gambling will become a commodity service and many providers will provide the same function. How long do you think it will be before Robinhood offers it?
Luke: That’s interesting in itself, whether Robinhood objectively enter the gambling realm? That might undermine a lot of their efforts around trying to become a serious financial institution.
Albert: Well, some people already think it deals in the gambling realm.
Luke: Well, Genius Sports isn’t for me. Although I do a fair bit of gambling, I don’t feel it’s an ethical investment. So those were four things that we didn’t pick to look at today, but we also did get a recommendation from Nate Cox on Twitter, and Nate suggested IAS, Integral Ad Science, and that’s the one we’d like to go for. It’s a really interesting space.
Albert: Well, as you can tell from the name, it deals in the ad industry, and we have Magnite in the model portfolio and we are bullish in programmatic advertising in general, so we were quite interested and this one.
Luke: Definitely. Keen to learn more about the sector and actually, by researching IAS, perhaps understanding my Magnite holding a bit better.
Virgin Galactic
Albert: But before we get there, Luke, there was a story that happened yesterday that was quite interesting. Richard Branson and a number of Virgin Galactic employees went to the edge of space in one of their company’s space planes.
Luke: Yeah, Unity 22 and it was a successful flight. I’ve got to say I was too busy watching Wimbledon to see Branson, but I did watch him on replay. Let’s not go down the sports rabbit hole, but my online gambling didn’t go so well yesterday. I was backing the Italian player Berrettini. He was brilliant at Wimbledon, but Djokovic is a monster and prevailed.
Albert: Never bet against Djokovic.
Luke: Yeah, I guess so. I was playing the underdog card. Sadly though, Italy made up for it later yesterday prevailing over England on penalties in the Euro final. I think a sporting well-played is deserved to every competitor yesterday.
Albert: Absolutely. I actually stayed up to watch the football in Hong Kong and it was a very long match and I was very tired, but it was a gripping ending.
Luke: Yeah, sad the way it finished out, but well-played everyone.
Albert: Yeah, getting back to Richard Branson and his spaceship, they reached 53 and a half miles above ground and experienced a few moments of weightlessness, and then landed back safely in New Mexico. And he was really excited when he exited the spaceship, jumping up and down, telling people how amazing it was to be weightless and upside down.
Luke: Well, he’s getting on a bit these days, Sir Richard.
Albert: I believe he is 70, turning 71 this year.
Luke: Bloody hell, he looks good for 71. I wouldn’t have guessed that much. Like I remember him doing his high-altitude hot air balloon flights, but hey, good on the guy, right? Billionaire and he’s pivoted his fortune into the space race. I’m not sure that Virgin Galactic are really going after the same market as SpaceX and Blue Origin, but good effort, Richard.
Albert: I actually saw a photo of them after the space flight and Sir Richard Branson had one of his female colleagues sitting on your shoulders after the flight.
Luke: It’s interesting, isn’t it? Virgin Galactic, they were SPACd recently, right, by Chamath?
Albert: They were a SPAC early this year and Chamath famously sold Virgin Galactic, and since he sold the stock has done really well.
Luke: Okay. I guess it’s a different proposition, right? Virgin Galactic are focused more on space tourism, whereas SpaceX are actually out there doing real engineering and preparing us for a real space race. But that’s not to undermine what Branson’s doing with Virgin Galactic. That’s getting people interested in space and opening space up to everybody I guess. At some point, it’s going to be affordable for you and I to do a near orbital flight with Virgin Galactic. You’d never get that chance to ride a SpaceX rocket.
Albert: I believe Virgin Galactic has already sold around 600 tickets priced at $250,000. That is still out of the range of most people’s wallets. It might come down but I’m not sure it will ever be affordable for most people.
Luke: Probably not today, but I’d pay a quarter-million dollars to get into orbit just to say I did it. And even if it’s only a five-minute experience, hey, why not?
Albert: Well, for what it’s worth, I don’t think I would. I wouldn’t pay $250,000.
Luke: Yeah, you know, Jeff Bezos is scheduled to go up in one of his Blue Origin flights, Blue Shepherd, next week, I think, on the 20th of July. He’s going with his brother, aviation legend Wally Funk, and the undisclosed winner of a $28 million auction.
Albert: I really want to know who that person is, Luke, but maybe they will remain anonymous the entire time by wearing an opaque helmet like the Stig on Top Gear.
Luke: Well, Elon has sold a seat on his planned tourist flight around the dark side of the moon I think. Been bought by an Asian billionaire artist.
Albert: It’s nice to be a billionaire, huh?
Integral Ad Science
Luke: But enough about space. Should we get back to our main topic of Integral Ad Science?
Albert: Yeah, so what does Integral Ad Science or IAS do? Well, it’s a technology company that analyzes the value of digital advertising placements and they describe their sector as digital media quality. One way to summarize it is that IAS tries to make every impression count when it comes to digital ads and you’re getting a return on advertising spending.
Luke: I saw quite an interesting quote from an early pioneer in advertising, a guy called John Wanamaker. He said, “Half the money I spend on advertising is wasted. The trouble is, I don’t know which half.” That’s quite an insightful comment. It’s just as true today as it was a hundred years ago when he said that.
Albert: Well, Integral Ad Science was founded in 2009 and it IPO’d just two weeks ago on the 30th of June at a valuation of $3.3 billion. Unfortunately, its share price has dropped since then and the market cap is currently around 2.8 billion, and this just about meets our criteria for hyper-growth stocks, which has to be less than $3 billion in market cap.
Luke: And let’s just take a quick review of the other hyper-growth filter criteria. We wanted companies that had annual growth of more than 10% quarter-over-quarter. They don’t make the grade here. They’ve actually only done 10% revenue growth in the whole of last year, but perhaps we have to give advertisers a pass. 2020 pandemic year was a lean year for advertising. It’s probably not the most relevant metric right now.
Albert: We also want our hyper-growth companies to have high insider ownership and IAS only has insider ownership of around 1%, and there’s also a big risk here around ownership that we’ll cover later.
Luke: And then our last hyper-growth filter is the penetration of their total addressable market. We’re looking for companies that are less than 10% of their markets. They’ve got loads of room to grow. Well, IAS, they’re a small company and they definitely make the grade here. They’ve got a TAM penetration of less than 2%. They’re very early in their lifecycle, but this is a growing market and this is really positive.
Albert: And they say their mission is to be the global benchmark for trust and transparency in digital media quality, but what does this actually mean? I think one way we can describe this is to go through the services and the first one ad viewability, this is simply to ensure that digital ads can be seen by a person. For example, you don’t want the ad to be too small or obscured by something else on the webpage or even off-screen entirely.
Luke: And then ad fraud is a really big part of their capability set. They want to make sure that their ads are seen by real people, not bots.
Albert: And finally, brand safety and suitability, this is to ensure that your ads are shown in places that match your brand values are not on inappropriate or harmful websites. I think obvious examples are adult websites, but advertisers will want to finely tune their audience to maximize return on ad spend. For example, you probably wouldn’t want your ad for pork sausages appearing on a website for veganism.
Luke: I did have a look at a couple of examples of bad ad placement. I saw some real comedy ones. Literally, a physical billboard in the real world with McDonald’s saying their dollar menu was straight ahead with a giant arrow pointing at the sign directly above it, which was talking about diabetes.
Albert: Another one that you found was an advert for Burger King and their really unhealthy breakfast of a croissant filled with scrambled egg and sausage, and next to it is an advert saying that one in three people in Louisiana would die from heart disease. I don’t think Burger King would be too impressed by that.
Luke: It’s pretty hilarious to see these advertising failures in the real world on billboards and in newspapers, but this stuff is even harder online, where the content is dynamic and potentially everybody is seeing something slightly different. So you can’t hand tailor your brand placement. You need smart programmatic advertising to ensure that your advert is placed in a suitable location.
Albert: And one interesting way they do that is they use something called contextual targeting, the use of AI to work out what the website is all about and to make sure that the ads appearing there are suitable.
Luke: We listened to a really interesting podcast yesterday while researching the episode. That contextual targeting has some really subtle implications. There’s a bunch of topics I’m interested in, but if I’m in work mode, I probably don’t want to be seeing adverts for beer. I’m not in the right frame of mind for that kind of advert.
Albert: When would you be in the frame of mind for beer, Luke? Anytime outside of work, right?
Luke: Pretty much. Yesterday, right? I was definitely downing a few beers watching the Wimbledon and the football yesterday afternoon.
Albert: You’re right. I was watching the football last night and for some reason, I really wanted to get a home delivery of a kebab.
Luke: Yeah, it’s really key for brands when they’re advertising to manage their reputation. It’s a top priority for every modern marketer. It was interesting researching IAS. There’s such a new company, there’s very little commentary out there. And I’ve got to say, when I’m researching companies, I do often shortcut it and look at other people’s opinions and views. In this case, we’ve had to go almost entirely to their own IPO filing and pull out a lot of information. So then the skill in researching the company is to apply our own common sense and due diligence to the claims the company is making. Well, they say in their IPO filing, “Our ad verification solutions serve buyers and sellers. For advertisers, we provide pre-bid programmatic and post-bid verification solutions. And the publishers, we provide optimization and verification. Our solutions can measure and verify ad fraud, brand safety, viewability, and geography for all digital ad campaigns.”
Albert: And I thought ad fraud was really interesting and I never really thought about this before, but I guess when you’re dealing with ads, a lot of the clicks that come through may not be coming from humans and can be coming from bots. And I read a stat recently that they estimate around two-thirds of all ad traffic is actually from bots, and the ways that ad fraud is done is getting increasingly sophisticated and they even call this sophisticated, invalid traffic or SIVT in the industry.
And here are some of the ways that it’s done. One way is that if fraudsters can infiltrate a device and install software that will mimic human behaviour and send more traffic to a website, and it’s very difficult to tell the difference between a bot and a person. Another way is to create a website with fake content just to sell advertising space. These are known as ghost sites and are typically only visited by bots.
Luke: I did some research yesterday on who are the fraudsters and what’s really going on here. It’s interesting but it’s really sad at the same time. Advertisers want their ads to be seen by eyeballs rather than algorithms otherwise, there’s no point in paying for the ad space, but they can’t tell the difference so they ended up paying for both. The attackers, as you say, are either supply owners buying clicks on their own website to generate revenue or their competitors trying to erode the ad spend of their competition.
I guess it’s just business but it just seems so unethical to operate in this way. I guess that’s why I’ve never felt the push to start my own business. I’m just not cut-throat enough.
Albert: And I’ve read that ad fraud is seen as relatively low risk with little chance of being severely punished.
Luke: That’s definitely true. I was reading a Reddit thread yesterday about some guy who bought up a bunch of genuine old websites. He covered them in adverts and then he bought clicks through a bot farm overseas. And then he did some analysis of his traffic, realized that nearly a hundred percent of his clicks were his fake ones, there were no real people, but these clicks were still getting past IAS and DoubleVerify and all the other fraud protection software that these advertisers were using. And this guy was still making a net profit after buying the clicks. And he closed this Reddit thread commenting that he was busy scaling up his business. It’s nuts.
Albert: It’s strange that he calls this a business, but I guess it’s making him money therefore it’s a business.
Luke: Yeah.
Albert: And IAS claim that their clients using their services see ad fraud decrease significantly, but a lot of ad fraud remains undetected. As we said earlier, there are estimates that two-thirds of ad traffic are created by bots.
Luke: IAS and also DoubleVerify, one of their key competition, I think they’re what’s known as like a black box provider. They provide their own metrics to the customers who use them around the level of protection they’ve offered and how much bot traffic they filtered out, but it’s almost impossible for a customer to actually verify that themselves. And all they can rely on is something called an MRC accreditation, media ratings council, and all that is is just a third party, like Ernst & Young, validating that companies like IAS are actually measuring what they said they would measure. It doesn’t really tell you if they’re being effective.
Albert: But IAS say they themselves are using AI and machine learning in their ad fraud detection, and I have to believe that over time, these capabilities will improve and get better, but it becomes an arms race between the fraudsters and people like IAS, and they have to continually improve their systems to fight against each other.
Luke: That’s definitely true. It does worry me that their solution today may potentially be relatively ineffective, but I guess [an] advertiser has to use a technology like this. You’ve kind of got no choice but to engage a company like IAS as part of your solution.
Tailwinds
Albert: But moving on, Luke, what are the tailwinds behind IAS’s business? They deal in digital media and digital media has seen significant growth over the last few years. There are estimates that say that total time spent online in the US grew 43% from June 2017 to June 2019, and this increased a further 15% in 2020, surprisingly.
Luke: Yeah, I saw some e-marketer estimates that the global non-search digital advertising markets surpassed $180 billion in 2020, and will grow to 270 billion by 2023.
Albert: Again, we’re seeing trends being accelerated by the pandemic. These trends that were going to happen anyway.
Luke: It’s all about being efficient with your ad spend. I think Juniper Research estimated advertisers will lose approximately a hundred billion dollars in annual ad spend to ad fraud in 2024.
Albert: And there’s the increasing importance of brand reputation, and ad campaigns have to run adjacent to content that meets the specific standards of the advertiser and meets their company values. And a survey done by the CMO Council found that over 25% of advertisers experienced contextual incidents detrimental to their brand reputation.
Luke: And, you know, a big tailwind that caused us both to invest in Magnite earlier this year was the rise of connected TV. Connected TV ad spend is expected to double from $8 billion last year to $18 billion by 2024. And with more connected TV ad inventory available, that’s just going to drive greater demand for verification solutions to ensure that there’s real people watching those ads.
Albert: Yeah, as we discussed in a deep dive in Magnite several months ago, more and more people are moving from linear TV to connected TV, and younger generations have grown up with YouTube and Netflix and are unlikely to ever watch linear TV.
Luke: We’ve also got to note that the changing regulatory landscape makes contextual targeting even more important. With increased attention on user privacy and the deprecation of third-party cookies, which Google stepped back on a few weeks ago, that makes this whole space much more complex.
Albert: And IAS have a solution they call Context Control, which uses semantic language technology to determine the context, sentiment, and emotion of the digital content. And machine learning has revolutionized language processing and it’s taken for granted these days, but don’t you think it’s amazing that you can talk to Alexa or any of the voice assistants and they understand you?
Luke: It truly is a wonder of the modern, I agree.
Albert: And tied to connected TV, there’s been an acceleration of programmatic advertising and we described this in detail in the Magnite deep dive where advertising space is sold in real-time and there’s a collaboration between supply-side platforms and demand-side platforms to link advertising space with the advertisers.
Luke: And as they come together, I guess these ad verifications and fraud prevention technologies are super important to both demand side and supply side to ensure that the ultimate customer, the advertiser, is getting good value for money.
Albert: And we are bullish on programmatic advertising in general, and personally, I have positions in Magnite, the leading independent supply-side platform, and in The Trade Desk, the leading independent demand-side platform. I think it’s likely that both companies will grow their businesses, but the shake-up over privacy and the removal of third-party cookies may benefit one side more than the other, and I don’t think I’m smart enough to know which one will benefit more so I bought both.
Luke: Yeah, I think that’s a wise approach. I’m pretty confident supply side is going to grow revenue share, which is why I’m a Magnite shareholder, but I agree, it’s worth having The Trade Desk also. It’s on my watch list.
Total addressable market
Luke: You know, when we were talking about tailwinds, we were touching on the growth of this market, so let’s just review how big the total addressable market is at the moment. Based on some March 2021 analysis by Frost and Sullivan, the global market opportunity for ad verification was estimated to be nine and a half-billion dollars and growing at a 16% CAGR over the next few years
Albert: And IAS are also in the market of measuring ad effectiveness and efficiency. And there are estimates that say the global market opportunity for ad measurement and effectiveness to be $6.3 billion and it’s expected to grow at a 20.5% CAGR from 2021 to 2025.
Luke: So it’s a big and growing market and IAS are a small, increasingly dominant player. That’s a really great position to be in if you want hyper-growth potential.
Competitors
Albert: And one of their main competitors is a company called DoubleVerify, which itself IPO’d earlier this year in April. It IPO’d at a valuation of around $4 billion and since then, its stock has increased almost 50% and its market cap is around 6.3 billion now.
Luke: Yeah, they’re about twice the size of IAS. There’s also a bunch of other players, companies like Moat, Meetrics, AdLoox, WhiteOps, and even someone called OhNoo. I don’t know much about these guys but I have read some fairly sceptical posts on Reddit about the effectiveness of all these technologies. As you say, this arms race of machine learning between attackers and defenders around ad traffic, it doesn’t sound like anyone really has a truly effective technology today.
Albert: But I believe IAS and DoubleVerify are the two largest players in this market.
Luke: And as public companies, they both have more money they’ve gained from their IPOs to invest in R&D and other acquisitions to bolster their capabilities.
Leadership
Albert: Looking at their leadership, a lady called Lisa Utzschneider has been their CEO since January 2019. And prior to joining IAS, she held the position of Chief Revenue Officer and Senior Vice President at Yahoo from 2014 to 2017.
Luke: Their original CEO and President is a guy called Scott Knoll. He’s still associated with the company but more in an advisory role.
Albert: And I see that their original name in 2009 was AdSafe, and they changed it to Integral Ad Science in 2012. Maybe the thought it was too close to AdSense, Google’s ad platform, but I have to say, I don’t like their new name, Integral Ad Science. It’s a bit unwieldy and it’s not memorable, and I had to look up what IAS stood for several times while doing the research for this episode. Is it integral or integrated or intelligent? Well, “A” is definitely for ad, but is it science or solutions or systems?
Luke: It is woeful, isn’t it? I’ve been immersed in this company for the last three days listening to podcasts and reading about it, and I still had to Google what the “I” stood for this morning. It’s a very, very forgettable name.
Albert: Well, maybe it doesn’t matter as much for non-public facing brands, but can you imagine if Netflix had called itself Internet Movie Service? I don’t think many people would have said IMS and chill.
Luke: So Lisa’s leading a company that’s now grown to 600 employees and we do like to look at Glassdoor to see what employees think of the company. Unfortunately, she’s got a pretty poor rating. She’s rocking a 73% CEO approval rating and the company overall only has 3.8 stars out of five.
Albert: But to be fair, many of the negative comments seem to be related to the growing pains of a startup to a public company.
Luke: We mentioned at the top of the episode that insiders, primarily Lisa, have around 1% stake in the company. There is actually an interesting other owner of equity. It’s a portfolio company called Vista Funds and Vista own 70, seven-zero percent of IAS.
Albert: That means that Vista has full control of the vote of all matters submitted to the board of directors. Is this a red flag, Luke, that Vista owns 70% of this company?
Luke: I think it is, but you’ve got to look at who Vista are and what they do, and also consider the fact that companies like Google and Facebook basically have the same structure where a small number of shareholders have special voting rights that effectively gives them full control of the company.
Well, Vista seemed to have a massive portfolio of over a hundred companies, mostly in the tech space. They’ve got significant stakes or full ownership in some cases in five different companies, specifically in the advertising space. And at least one of these, a company called TripleLift, is somewhat of a competitor to IAS, although it does seem they partner to some extent. I guess it’s only a red flag and a worry if you think Vista are going to make decisions that don’t benefit IAS, but with their 70% exposure to the company, you’ve got to imagine that they wouldn’t be incentivized to do something truly bad for the company.
Customers
Albert: And looking at the customers, in their IPO prospectus they said that they serve 2,062 customers consisting of 1,924 advertising customers and 138 publishing customers. These are quite small numbers.
Luke: Yeah, they’re oddly specific numbers, aren’t they? And they just really serve to highlight how small this company is.
Albert: But they do say that between December 2017 and December 2020, the average revenue per customer for their top 100 customers has grown at a CAGR of around 22%. I guess this number is similar to the DBNRR that we often look for for SaaS companies but it’s not exactly the same, but it is showing that the customers are spending more on their platform.
Luke: In terms of customers as well, they also have a bunch of integration partners, companies like Google, Facebook, and Amazon, and they’re companies that account for a large part of digital advertising budgets, so clearly important partnerships to have.
Albert: Yeah, I think we mentioned a weeks ago that these three companies comprise 90% of the online ad market, but they also say that they don’t generate material revenue directly from their arrangements with their integration partners, partners, such as The Trade Desk and other demand-side platforms and also supply-side platforms like Magnite.
Luke: You know, I thought It was quite interesting. It does turn out iAS have got a deeper relationship with Twitter and they truly are a customer of them. I think in 2020, Twitter announced a new partnership with both DoubleVerify and IAS to provide their advertisers with increased assurance around placement of ads in the Twitter app on people’s timelines and to safeguard against dodgy brand association with controversial content.
Financials
Albert: And finishing off with their financials, we haven’t seen any earnings releases from them yet as the IPO’d only two weeks, but they did reveal that their total revenue for 2020 was around $241 million, which is a 12.7% year on year increase. But as we said, 2020 is probably not the best year to compare ad spend.
Luke: And you mentioned their CAGR and how that’s similar to DBNRR. Well, DBNRR is an important metric and it was 112% in 2019 but reduced to 108% in 2020. So that shows that actually, their customers are growing their spend but they’re growing their spend at a slower, and that’s kind of close to a hundred percent. That’s really not comfortably over a hundred percent. That’s not hugely reassuring in terms of the quality of the product.
Albert: And the company’s not profitable yet, and they had losses of around $32.4 million last year. And the loss in the previous year in 2019 was even higher at $51 million.
Luke: Yeah, so they’re on that journey to profitability, but looks like they’ve got a little way to go yet.
Key takeaways
Albert: But what are the key takeaways, Luke? I think that IAS and this sector, in general, is at the intersection of a number of trends in the ad industry. Trends such as programmatic ads, connected TV, social media, ad suitability, and consumer privacy.
Luke: I think there’s a lot of appropriate scepticism around the effectiveness of ad fraud detection technology. IAS are one of the bigger players, but it doesn’t seem like they’ve got a particularly great solution. But to be fair, their competition isn’t much better, and maybe the real business question here is what else can a demand-side platform do other than to use companies like this. IAS are one of the biggest. Possibly advertisers just want to tick the box and say they’re addressing ad fraud, even though they know it’s not that effective.
Albert: After this deep dive, I’m somewhat interested in this company and the business as a complement to my positions in Magnite and The Trade Desk. However, I think I will pass for now. We only spent a few days looking into this company and I’d like to find out more information and maybe also wait for one or two earnings releases before I make an investment decision. And also I hate that name.
Luke: The name is bad, but I’m quite tempted, I gotta be honest. I really want to build out more of a basket in this growing digital advertising area, and I feel a bit exposed just having Magnite in my portfolio. The shrinking DBNRR concerns me and I’m definitely concerned about the effectiveness of the technology, but they have now got a ton of cash to invest as a result of their recent IPO, and I hope that Lisa invests that effectively to build out their capability. And, you know, with these hyper-growth stocks, we’ve got to remind ourselves we need to exercise a low bar for investing. When we get stuck into one of these, it’s generally a half a percent investment, so you know you’re taking a bit of a flyer on a potential 100x growth or maybe it goes to zero.
So, you know what, I think my bottom line is I’m going to exercise that low bar and I’m going to pick up a half percent allocation in IAS for myself, but I’m going to follow your lead, I think, and I’m going to buy a bigger chunk of The Trade Desk at the same time. So, Alb, how do we account for this on Telescope Investing? Is it a hyper-growth stock or not if I buy it and you don’t?
Albert: How about you buy IAS and I buy DoubleVerify?
Luke: That is not a basket of stocks. That’s a competition! Did you even look at DoubleVerify?
Albert: I saw that it’s twice the size of IAS and it’s profitable.
Luke: You bastard. I can’t let you buy this and not me. You know what, actually, we’re having a bit of a joke around this, I saw this in the show notes though when I woke up this morning. You’ve clearly taken that decision to buy DoubleVerify last night. I’m not convinced you’ve done any research. I did five minutes of research for you, Albert. You’re right. They’re profitable. They’ve actually got much better Glassdoor ratings. Double the CAGR on the same revenues, 33% compound growth compared to IAS’s 13%. Screw it. I’ll buy them both, half a percent each.
Albert: Obviously, you are much more risk-tolerant than me, Luke. In reality. I’ll probably wait for the earnings releases for both companies before deciding on what to do on both of them.
Luke: Man, if you scam me into buying two dog companies and then you get in at a better price after earnings.
Albert: Hey, I’m not making you press that buy button!
Luke: Oh well. Well, today’s episode was good because I feel like I understand the industry much better. Right, so I think that’s the bottom line. I’m going to buy a half percent in each of these two, DoubleVerify and IAS, and a bigger chunk of The Trade Desk. And you’re going to sit on the sidelines and laugh at me as my own hyper-growth portfolio descends into the abyss of negativedom.
Albert: Well, hopefully not, Luke. Hopefully, you’ll make a big return, much more than I will, getting in late at a higher price.
Luke: Let’s hope so.
Albert: But I did find this episode really useful, Luke, in understanding the ad industry better. We have Magnite in our model portfolio and I’ve invested in The Trade Desk so I’ve done a fair bit of research, but even then, I don’t know the ins and outs of the entire business. I’m not an expert in the ad business at all and doing research like this really helped me build conviction in these other companies as well.
Luke: Yeah, I agree. I never would have thought this would be such a focus area in my portfolio, but if I’m suddenly going to have four positions in it, I guess that reflects my sentiment that connected TV is really going to grow materially and drive ad spend. It’s a massively growing area.
Wrap
Albert: Well, I’m quite sleepy after watching the football last night. I didn’t get much sleep, so let’s call it an end and say thanks for listening.
Luke: If there’s a future topic you’d like us to cover, you can message us on Twitter. I’m @LukeTelescope.
Albert: And I’m @AlbertTelescope, or you can email us at feedback@telescopeinvesting.com.
Luke: If you enjoyed today’s episode, you can find more content at our website, telescopeinvesting.com, where you can leave us a comment or a review.
Albert: And if this is your first time tuning in, perhaps consider subscribing to the website so that you’re the first to hear about new articles and episodes as they drop.
Luke: And, you know, if you go to telescopeinvesting.com today, you won’t find any adverts. We’re not trying to monetize our content. All that insight’s there for free.
Albert: At least not yet.
Luke: Thanks, Albert.
Albert: Thanks, Luke.
