#42: 4Q22 AdTech18 Portfolio Review
Winners/Losers; What caught our eye in Q4; What's up with Zeta?
Today is Everything You Think Is Wrong Day. It’s a day to make us realize that we are not always right. Not even Quo Vadis about Adtech Land 🤣🤣🤣
Whatever you do, try to avoid making any major decisions because nothing goes right today. That goes for adtech stocks too. For instance, our QV AdTech18 is down around ↓2% today. There you go. But as we like to say with our McKinsey hats on at Quo Vadis… when we arrive at an answer, how wrong could we be and how much might it change our answer.
Reading Time: 6 minutes that are probably more right than wrong 🔥🔥🔥
Where do they stand?
Now that everyone has reported Q4 except for S4 Capital, let’s take a look at how things are going across our QV AdTech18 portfolio.
Had you bet $100 in January 2018 when our portfolio started, you’d be up $292 today. When we ran our Q3 update on November 23, the QV AdTech18 was up $270 so Q4 put in respectable gains of ↑8%.
Winners: 6 out of 18 adtechies are in the black. With the exception of ZETA 0.00 we expect TTD, MGNI, ROKU, S4, and CTRO to remain our portfolio pillars.
Losers: The other 12 players will likely continue to underwhelm investors and struggle to contribute to portfolio gains. Let’s face it, most of these companies have either weak business models or non-understandable models or both. And they also have to play ball in a highly competitive market where buyers and sellers are busy consolidating their partners of choice. That’s a hard game to play when you have serious unit economics problems.
As we’ve said many times before, programmatic should always be considered a market of psychological arbitrage. Whoever is best at getting their story to stick in the advertiser’s mind wins the most ad budget and everything else good that follows.
Quo Vadis Portfolio Trend
With the pandemic in the rearview mirror and interest rates rising, the market has moved from a shotgun-is-good-enough approach to a more targeted best-of-breed mentality. When we look closely, we see the market today is pretty much where it would have likely been if the pandemic never happened.
With that in mind, even though adtech has taken a beating with higher interest rates (like everyone else), our basket of 18 adtechies is still well ahead of the Nasdaq over since January 2018.
Catching Our Eye in Q4
The Trade Desk falls short on gross ad spend coming in at $7.74 billion. That surprised us. Given past beats on gross ad spend, we thought $8 billion was a no-brainer, particularly with Q4 seasonal spending. If TTD ( TTD 0.00 )had come in at the high end of our range around $8.3 billion we wouldn’t have even blinked. Everything good in adtech flows from attracting gross ad spend. So when a company like TTD falls below its own trendline, we think investors need to take note.
Trade Desk DCF Perspective: If you missed our valuation model post on TTD last week, check it out here. Our model is generous, but we only get to a fair value of $18.50/share. It’s trading at ~$56/share today.
Criteo ( CRTO 0.00 ) is rumored to be looking for a buyer. Investment bank Evercore Inc is advising Criteo on the process. Megan Clarken, Criteo’s CEO, has done an awesome job turning things around from the mess that the previous CEO Eric Eichmann left behind. We would not be surprised if Clarken was looking for her next turnaround adventure, but this time jumping from a sub-$2 billion market cap player to a ~$20 billion company. In any case, we think investors and private equity dealers don’t fully appreciate how well Criteo is positioned. What they see is a molecule, Quo Vadis looks for the electrons that make the atoms. Think about it this way… TTD attracts 4x gross ad spend but Criteo generates more free cash flow.
Tremor (TRMR 0.00) is in talks to be taken out. Tremor has asked Goldman Sachs bankers to help review its options and evaluate offers, according to a Sky News report. Tremor just acquired DSP Amobee in September for $239 million so that’s interesting timing. From our perspective, buying Amobee is like a Ford Pinto buying a Ford Edsel. Sure, there is tech under the hood that gets you from A to B (maybe), but it’s not enough to win against the muscle performance cars racing to attract ad budgets.
Note that as of the acquisition date, Amobee had net operating loss carryforwards of approximately $315 million that Tremor plans to utilize over the next 53 years. Looks like an Edsel to us.
That said, Tremor somehow produces consistent operating profits, relatively respectable free cash flow, and has a positive ROIC economic spread albeit declining in recent quarters.
Acuity ( ATY 0.00 ) and Roku ( ROKU 0.00 ) were saved by Uncle Sam refunding SVB deposits. Both stocks fell off ~6% on the news last week, but have since recovered. For a great play-by-play overview of what happened to SVB and why check out how Marc Rubinstein breaks it down.
Buzzfeed ( BZFD 0.00 )thinks AI can save its business model. We’re not sure how ChatGPT AI is going save this business model or produce meaningful free cash flow. But why not, go for it!
Fibonacci Broke Through and Fell Back Down
A few months ago we set a recent portfolio high at $662 and a low of $336. Recall that the QV AdTech18 peaked at $1,151 in February 2021.
Then we traced Fibonacci resistance lines between the high and the low. The portfolio has been bouncing around ever since. It broke through to the upside for a hot minute before falling back. If we had to bet, we’d give better odds on the QV AdTech18 busting through the $336 support line before it sniffs $406 again.
Spotlight: What’s up With Zeta
Looking back since November 2021 when our QV AdTech18 became eighteen companies after the onslaught craziness of pandemic-led IPOs and SPACs, ZETA 0.00 is the only player with positive returns. That’s incredible considering what the Bear Cave newsletter called it out in May 2022.
Here’s what The Bear Cave had to say:
Zeta Global Holdings describes itself as “a leading omnichannel data-driven cloud platform that provides enterprises with consumer intelligence and marketing automation software.” In reality, Zeta is a roll-up of low-quality marketing and data gathering companies. Zeta’s products collect consumer data from far-right news sites like Breitbart and The Daily Caller and then help businesses like for-profit colleges and gambling apps aggressively market to consumers. During its delayed and downsized IPO process, Zeta was questioned by the SEC for “a lack of contemporaneous documentation and accounting analysis” and Zeta’s management has a history of failure.
According to Zeta's site, its platform and data empower the world's largest brands to acquire, grow and retain customers across the entire omnichannel marketing experience.
What Quo Vadis cannot get to jive is investor appetite to own this company that clearly has little ability to generate operating profits and free cash flow. Sure, Zeta’s cash flow trend is heading toward breakeven but not for several quarters down the road (maybe). How investors don’t see a low likelihood of value creation compared to owning other alternatives is beyond us.
Go figure. Everything is relative.
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Disclaimer: This post, and any other post from Quo Vadis, should not be considered investment advice. This content is for informational purposes only. You should not construe this information, or any other material from Quo Vadis, as investment, financial, or any other form of advice.