Description

Rubicon (RUBI) March 24, 2020

We are in a COVID-19 driven global recession. On Friday we will read that millions of Americans have filed for unemployment claims.  I do hope that the federal government will do its best to support millions of families that will suffer during 2020. 

This report is about the more mundane topic of a stock recommendation. 

I do believe that the combination of stimulus from the federal government, and Federal Reserve, plus  a peak in COVID-19 infections will allow the US economy to begin to recover later in 2020. To maximize risk and return I am recommending a company in the digital advertising industry whose stock price has declined 57% since Feb 19th. Sales and profits will be depressed  in 2020, but sales could double by 2023. The name of the company is Rubicon (RUBI),  and they have a strong balance sheet to withstand the financial pressures expected over the next six months. 

We know that the near term news will be horrible. Twitter, an advertising driven business pre-announced March 2020 quarterly results today. Advertising sales grew about +13% year over year in the months of Jan & February 2020. In the month of March 2020 sales appear to have plummeted by (44%). The analyst at JP Morgan reduced his 2020 profit forecast and now projects that EBITDA for Twitter will decline year over year by 50%. Inspite of this dire forecast, Twitter’s share price rose today, despite a valuation of 6x times reduced 2020 EV/sales, and 30x times reduced 2020 EV/EBITDA.  Rubicon is a more attractive investment and I will explain why for the remainder of this report. 

Comparative Income Statements:

The most similar public company to Rubicon is Tradedesk (TTD).

The Rubicon  business has a lot of operating leverage with over 44% incremental EBITDA margins.

Tradedesk provides a view of the financial statement profile Rubicon will show as sales triple.

The table below shows how as RUBI sales triple over a few years its EBITDA can rise seven-fold as 

EBITDA margins rise from 12% to 32%.  Tradedesk a first cousin, is a larger version of Rubicon. 

Firm TTD RUBI

Year 2019 2019

Sales $661 $223 Million

GM% 77% 67%

EBITDA$211 $27 Million

EBITDA 32% 12%

Comparative Valuation:

I have assumed that advertising sales at Rubicon, Tradedesk and Twitter decline (30%) in 2020. 

The weakest quarter will be June 2020 where sales could decline (50%) year over year. 

Even after its decline Tradedesk trades at 12.8x times 2020 EV/sales that are depressed.

Twitter is valued at 6x EV/sales for 2020.

Last year a direct competitor of Rubicon was acquired for 5x times EV/sales.

Rubicon as the small cap in the group is valued as 3.2x EV/sales for the depressed 2020 year. 

RUBI has a strong balance sheet with $150 million in cash and no debt after the Rubicon-Telaria merger closes. Even if the company loses money in 2020 for one or more quarters the company has plenty of cash.  At the current $5.63 price/share RUBI is trading at 4x times cash.

When To Buy The Stock:

Over many years of investing I have noticed that cyclical stocks tend to bottom in the quarter of maximum year over year sales decline.  The June 2020 quarter will have the maximum sales decline with the assumption of a 50% decline. Thereafter as the economy reopens sales will improve and the stock price should as well. Our stock recommendation could be a little early, but this report provides you the background information to decide if you wish to wait a month or two to invest in Rubicon. 

2021 A Much Better Year:

Our assumption is that the digital advertising market declines by (30%) in 2020 and then grows 30% in 2021. Rubicon is expected to gain market share (explained later) which will drive 50% sales growth in 2021 for the entire company.

On December 19, 2019 Rubicon (RUBI) and Telaria (TLRA) announced an all stock merger where Telaria shareholders will receive 1.08 shares of RUBI for every 1.0 share of TLRA that they own.  A completion of the merger is expected within a month. Company management had forecasted $20 million in cost synergies in December 2019, with most of the savings linked to public company costs and no employees being furloughed.   With the economy plunging into a recession we believe the company may seek to cut costs by a total of $50 million.

Company Description:

Once upon a time buying and selling common stock on the New York Stock Exchange was done by humans. Today the process has been  automated by computers. Today buying and selling advertising space on the television and the internet is still mostly done by humans. The automation of this process has begun and it is called “programmatic advertising.” 

TradeDesk is the largest programmatic exchange for advertising buyers and here is a quote from one of their advertising agency customers.  “We believe advertising will be transacted digitally,”

“The future of all media is digital and programmatic …eventually all media will be digital and it will be transacted by machines.“ 

Companies that succeed in automating the process of buying and selling advertising inventory, have the opportunity to create enterprises worth tens of billions of dollars in market capitalization.  Brands such as Apple or Colgate  are the buyers of advertising inventory and can make programmatic  purchases via Trade Desk which has a $9 Billion market cap. Publishers are sellers of advertising inventory such as Hulu television or Spotify.  There is an opportunity for one or more companies to help the publishers automate the process of  selling their advertising inventory. Both Rubicon Project and Telaria are striving to become programmatic advertisers for publishers like Spotify and Hulu,  and in this large $100 Billion digital advertising market create an enterprise with a multi-billion dollar market capitalization.    

Advertising Market:

Over $333 Billion was spent in 2019 worldwide on digital advertising. About two-thirds of that ad spending is in several captive walled gardens such as Google $104 Billion or Facebook  $70 Billion. The remaining $100 Billion of advertising is spent in the open internet which is the market that Rubicon and Telaria serve. Eighty percent or $80 Billion of this advertising is sold the old fashioned way with a sales-force. Twenty percent or $20 Billion of this advertising spend has been automated with advertising exchanges.  

Here are the four key assertions in the Rubicon-Telaria  investment thesis:

1. The $20 Billion programmatic advertising market is going to grow at a 6% CAGR during 2019-2023 as publishers opt to sell more of their advertising inventory through these automated marketplaces. 

2. Rubicon-Telaria will benefit as a consolidator and grow its programmatic market share from 6%

   Catalyst

   An end to the stay at home policy by April should allow the economy to begin to recover. 

   A full recovery may take years, but sales should improve from the lows that will be seen in the June 2020 Quarter.