Jack Vander Aarde | Equity Analyst
LinkedIn Profile
Maxim Group

SUMMARY:

  • KBNT’s core offering, Audience Cloud, seeks to disrupt the $325B+ digital advertising market and address the industry’s current pain points.
  • In 2019, advertisers lost ~$42B to ad fraud, which is forecast to grow into a $100B problem by 2023, but Kubient has a potential game-changing solution called “KAI.”
  • We expect 2021 to mark a solid growth inflection year and anticipate 20%+ net income margins by 2022.
  • Solid balance sheet with minimal debt; we do not expect the company to require additional capital for at least the next 12 months.
  • KBNT is up ~43% QTD, but down ~36% since its Aug 2020 IPO; with shares trading at an EV/revenue multiple of 0.9x our 2022E revenue vs. peers at 5.6x, we initiate coverage with a Buy rating and price target of $10.

DETAILS:

Kubient seeks to disrupt the digital advertising industry. Audience Cloud is a cloud-based advertising platform and marketplace, which also involves KBNT’s software, artificial intelligence (AI), and algorithms. KBNT aims to fully address current industry problems such as fragmentation, lack of transparency, significant ad fraud, wasted ad spend, and latency issues that plague the market. Audience Cloud combines the traditionally separated functions of the demand-side platform (DSP), the supply-side platform (SSP), and the data management platform (DMP) into a single platform to drive increased return on advertising spend (ROAS) for advertisers and publishers.

Near-term TAM opportunity tied to the $325B+ digital ad market. According to eMarketer estimates, 2019 worldwide digital ad spending totaled $325B+ and represented just over 50% of total media ad spend, which marked the first time in history that digital ad spend exceeded traditional ad spend. The digital ad market is projected to increase at a CAGR of 13%+ and reach $485B+ by the end of 2023.

KBNT’s anti-fraud solution (KAI) targets the $40B+ digital ad fraud problem. According to Juniper Research, advertisers lost an estimated $42B to advertising fraud in 2019, and ad fraud is forecast to grow into a $100B problem by 2023. KBNT generated $1.3M of net revenue in 1Q20 from successful beta tests with two large enterprise clients for its high-margin KAI fraud detection platform. We also highlight that these two beta clients indicated that KAI was identifying and preventing ~30% more digital ad fraud than the clients’ current anti-fraud partners.

We expect 2021 to mark a solid growth inflection year. We project 2021 revenue of $6.6M, up 211% y/y, and 2022 revenue of $17.4M, up 164% y/y. The business is highly scalable and should unlock significant operating leverage as revenue grows. We expect the company to achieve positive adjusted EBITDA of $4.9M in 2022 (~28% margin), based on our revenue projection of $17.4M. We also project 2022 net income of $4.6M and EPS of $0.53.

Compelling valuation. KBNT shares currently trade at EV/revenue multiples of 2.4x and 0.9x our 2021 and 2022 estimates, respectively, which represents a significant discount to the peer average of 7.0x and 5.6x consensus 2021 and 2022 estimates, respectively. Our 12-month price target of $10 is based on our DCF analysis, which corresponds to an EV/revenue multiple of 4x our 2022 revenue estimate and represents a discount to the peer average. Given KBNT is an early-stage business with lower revenues and has yet to generate operating profits, we believe a discounted multiple is justified. Key assumptions within our DCF, include: 1) a 9-year revenue CAGR of 93%; 2) a long-term adjusted EBITDA margin of ~60%; 3) a terminal FCF multiple of 12x; 4) a WACC of 16%; and 5) a higher share count.