Integral Ad Science – Soft Price Action, Resilient Operating Performance (NASDAQ: IAS)

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Shares of Integral Ad Science Holding Corp. (NASDAQ: IAS) have been struggling after the company went public in the summer of last year. At the time, I concluded that Integral was counting on impressions, as it was trading at compelling relative valuations. With shares under pressure since the summer, amidst the retreat in technology valuations, appeal has increased a great deal as the business has been doing just fine on an operational basis, and guides for another strong 2022.

Impressions Count

Integral Ad Science has a mission to make impressions count. The company hopes to become a benchmark for trust and transparency in digital media for leading brands, publishers and platforms.

Customer impressions are measured across many channels and settings, and with the number of channels and settings on the increase, it is reliability and quality of impressions which become more important as they are lacking right now. Hard to measure impressions include displays, social platforms, video, browsers, CTV and other channels.

Given the increase in the amount of advertisement spending, there is a real role to provide for those who can provide reliable data on these hard to measure channels. The company aims to do this with its Media Rating Council, being the metric to verify that an impression is seen by a human, not a bot. The company has relationships with all the big players which includes platform users like Amazon, Facebook, Google, Instagram and Pinterest, among others.

With hundreds of billions being spent on online advertising, this requires quality measurements, as there certainly was and still is real potential. The company went public at $ 18 per share last summer, which worked down to a $ 2.7 billion enterprise valuation.

The company generated $ 213 million in sales in 2019 on which it posted a $ 34 million loss. The company grew sales 13% to $ 240 million in 2020, in which was a very strong year of course, as operating losses narrowed to $ 14 million. Encouraging is that the company ended 2020 with> 20% revenue growth as first quarter sales for 2021 were up 24% to $ 67 million, running at a $ 268 million run rate, implying a valuation at around 10 times sales. Encouraging was the fact that operating earnings were posted at $ 3 million in the first quarter of 2021, at least no losses were showing up, which was the case with many technology IPOs at the time.

The 10 times sales multiple translated into relative appeal, yet 20% revenue growth was decent, but nothing spectacular. Additionally, the fact that profitability was achieved was comforting, but, of course, earnings multiples were not indicative here. Other than the valuation risks, I believe that the advertising market was cyclical, as the effectiveness of the solution (and that of its peers) was arguably the greatest risk.

What Now?

After shares went public at $ 18 and traded around the $ 20 mark in the first days of trading, the shares have been seeing relatively low volatility in the wake of its offering as the relative appeal drove shares up to the $ 30 mark later in 2021. Ever since shares have sold off, alongside the rest of the sector, now trading hands just below the $ 12 mark, down 60% from the high, and down a third from the offer price.

Since the public offering, we have seen quite some news flow. In August of last year, Integral announced the $ 220 million purchase of Publica, a connected TV advertising platform, with few financial details announced. The company furthermore posted strong second quarter sales, with revenues up 55% to $ 75 million and change amidst a rapid increase in programmatic revenues. The company posted an EBITDA number of more than $ 25 million, albeit heavily distorted number with $ 41 million in stock-based compensation being adjusted for, related to the IPO.

The company guided for flattish sales on a sequential basis, albeit that EBITDA was set to fall back a bit to $ 17 million, but the operational momentum was still very sound. Other operational momentum was seen in the remainder of the year, including a partnership with TikTok.

Third quarter sales slowed down to 32%, as revenues of $ 79 million were stronger than guided for adjusted EBITDA of $ 25 million was far stronger than guided for well, yet flat on a sequential basis. Stock-based compensation fell back to $ 8 million in the third quarter, albeit that the company reports quite some D&A charges. Moreover, the company guided for a strong end to the year, with fourth-quarter sales seen at a midpoint of $ 95 million and adjusted EBITDA seen around $ 29 million.

The company has rapidly built up a track record of beating its own guidance. In March, it became apparent that fourth quarter revenues rose 31% to $ 102 million and change, with EBITDA improving further to $ 33 million. This resulted in real earnings with stock-based compensation flattish around $ 9 million and while D&A expenses came in at $ 17 million, the majority likely to be amortization expenses, revealing real profitability.

With a resulting share count of 143 million shares, the valuation has shrunken to $ 1.7 billion, or close to $ 1.9 billion if we factor in net debt of $ 170 million. The 2022 guidance calls for revenues at a midpoint of $ 420 million and EBITDA at a midpoint of $ 131 million. This works down to 30% revenue growth, and similar growth in EBITDA after that metric came in at $ 103 million in 2021.

All of this works down to 4-5 times sales and a 15 times adjusted EBITDA multiple, as realistic earnings multiples are likely still very high, at least double the EBITDA multiple.


With signs on the horizon that the adverting market is getting a bit softer, partially as a reversal of the pandemic play with less spending and thus likely advertising taking place on digital channels, there is room for a downward surprise. Despite this concern, I am happy with the continuation of 30% revenue growth this year, even if it comes in a touch of light. Moreover, EBITDA margins are seen up at a similar pace as the business is really profitable, and the discipline seems to be displayed upon with regard to stock-based compensation, not always applicable for recent IPOs.

Given all of this, I see appeal rapidly increasing here and, while there are still some concerns, the risk-reward has improved dramatically, as appeal is rapidly becoming evident for opportunistic investors with a tolerance for some risks.

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