Ad tech is arguably one of the most polarizing cornerstones of the marketing industry.
While some herald it as the future of the industry, others decry it as a major threat to civil liberties given the abuses of vast sums of online user information — the cause of laws such as GDPR.
Meanwhile, there are those that denounce ad tech, or programmatic, as nothing more than spiel conjured up to talk brands’ marketing departments into spending (perhaps even wasting?) more of their media budgets. There’s a reason some agencies and marketers complain of an “ad tech tax.”
Last year saw a flurry of ad tech companies debut on the public markets, either via way of an initial public offering or special purpose acquisition company (SPAC), indicating a rapprochement between Wall Street and the sector. But according to LUMA Partners, which states there are now 24 public companies in the sector, the market performance of such companies remains largely flat compared to 2020.
Currently, there is a widespread perception the window to join the latest tranche of public ad tech companies is coming to a close, or at least approaching a hiatus. So, with the market seemingly at a fork in the road, Digiday took the opportunity to scrutinize some perceived ‘wisdoms’ in the market.
Seasoned observers of the sector will tell you the ‘class of 2021’ was not the first rodeo for ad tech on the public markets. During the early-to-mid 2010s we saw the likes of Rocket Fuel fly high on the Nasdaq, only to crash back to earth (along with others).
Lemonade Projects recently analyzed the performance of 18 public ad-tech companies after their latest wave of quarterly earnings calls and found the vast majority of them are hovering at a 52-week low. Tom Triscari, an economist at the consulting firm, noted how there were nine “unicorns”, a.k.a. companies with a $1 billion-plus market capitalization, although he does note that in many cases “words like ‘premium’ or ‘transparency’ lost all their meaning in Programmaticland [sic] long ago.”
I think there’s going to be a repricing, a lot of companies are overpriced
Ciarán O’Kane, general partner, FirstParty Capital
While such assessments do help to bring some sense of much-needed rational thinking to the grandiose statements public companies make to the market, others note how analysis of recent ad tech stock prices, plus a lag in the pace of IPOs, requires some balancing of external factors into the equation.
Terence Kawaja, CEO of LUMA Partners, said those stock price trends reflect macroeconomic issues, such as increases in the cost of borrowing and uncertainties stemming from the conflict in Eastern Europe, which are impacting all technology stocks, not just ad tech.
Such nuance is required if companies such as The Trade Desk — a company that debuted on the public markets in 2016 with a current market capitalization that easily surpasses all of the industry’s main holding companies — are to be compared to the likes of Rocket Fuel or YuMe.
“This is why I always go back to earnings performance,” Kawaja said. “Saying ad tech is in for a tough time is theory … but [if] you look at the [few] number of firms that missed [earnings forecasts] and the ones that made it, then the vast majority of them are making their numbers.”
Critics have labeled the latest flurry of public listings as yet another bubble, fueled by the SPAC craze that overtook Wall Street last year, but according to LUMA Partners Indices, just four of the 18 companies in the sector did so.
Ian Whittaker, a market analyst and founder of Liberty Sky Advisors, said ad tech companies were peripheral beneficiaries of members of the public using their government stimulus checks to invest in technology stocks.
He acknowledged that it’s “hard to say” whether or not early-stage investors and founders of ad tech companies used the SPAC opportunity to experience their liquidity moment prematurely — pointing out how even industry heavyweights such as WPP took a similar route to the public markets. “For some of the ad tech names that structure was going to be attractive because it gave the management teams a lot of flexibility in terms of structure,” added Whittaker. In other words, SPACs aren’t just for fly-by-night ad tech firms.
That said, one source with expertise in the IPO and SPAC processes, who declined to be named as their employer is a publicly-listed company, told Digiday the availability of the latter did allow some “problematic” companies to list.
The source echoed Whittaker’s analysis that companies in the sector that took advantage of the SPAC opportunity benefited from investor confidence, a sentiment that is now on the wane given macroeconomic conditions such as supply chain issues and inflation.
“A lot of investors that backed SPACs went into it with a mindset that the market could only go up, but we’re in a bear market at the moment,” the source added.
In the parlance of finance and investment professionals, it’s probably worth hedging on this one, as there’s a lot to unpack.
True, the rate of ad tech companies debuting on the markets is notably tapering off, plus there is a clear decline in public company valuations. These are due primarily to the macroeconomic issues governing the wider global economy.
Nevertheless, there are sector-specific issues to take into account, such as privacy laws prompting data rollbacks from some of the internet’s major platforms like Apple and Google. Such policies will unquestionably impact smaller companies in the sector with Big Tech the likely beneficiary.
In a recent presentation, dubbed “Feast and Famine in ’22“, Arete Research’s Rocco Strauss claimed Apple and Google’s ID deprecations fueled the flurry of flotations last year, adding that the market conditions for independent ad tech is likely to become much harsher. “They had to rush to market before [it] will actually be found out that they have no solution for the issue,” he said, adding that many smaller companies in the space just don’t have the ability to comply with the laws that have been put in place.
On the contrary, Dan MacKeigan, a partner at Spring Lake Equity Partners, points out that many companies in the sector that went public during the latest window simply did so because the conditions were right.
“Many of these companies were earlier stage than you might see historically in their evolution, but what was unique about this particular category of companies, in my opinion, was that they were profitable.”
According to several sources consulted in the research of this article, the current wave of privacy laws will likely prompt both advertisers and the public markets to back Big Tech with their investments, at least in the near term.
Ciarán O’Kane, general partner at investment firm First Party Capital, told Digiday the current dynamics mean it’s unlikely there will be further public ad tech listings until 2023 at the earliest. Additionally, he noted this dynamic is likely to place pressure on companies that have raised considerable funds that now have investors expecting a commensurate ROI.
“I think there’s going to be a repricing as there’s a lot of companies overpriced right now because they were benchmarked against the public markets six to 12 months ago” when conditions were a lot more buoyant, he said.
“The kinds of companies that will survive will be the ones that are diversifying their product range meaning they’re more than just an SSP,” O’Kane concluded. “A lot of the companies on the market are going to start crossing between the buy and sell side. Investors want to know where is the moat? What do you have that nobody else has?”