#85 [Revised] Teads Fair Market Value
Valuation revised from $2.2B to $1.82B
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Earlier this week we posted our thoughts on Teads fair market valuation. As our readers know, valuation models are an imperfect exercise with continuous room for improvement.
Quo Vadis loves getting your feedback. A handful of our wonderful subscribers provided constructive feedback on a few things we missed on our first swing at the bat which led us to this revised valuation note.
In the meanwhile, Business Insider reported today that “Outbrain has emerged as a frontrunner to acquire, merge, or otherwise invest in Altice's video-focused adtech company Teads.”
It will no doubt be interesting to see how a deal with Outbrain is structured. With only $163 million in cash and $118 million in long-term debt, it’s hard to imagine a full acquisition of Teads.
Revised Valuation
In our first draft effort, we missed looking at how Altice breaks out Teads P&L in their consolidated financial statements for FY21 to FY23 which provides a more accurate view of gross revenue growth, other operating expenses (aka cost of revenue), and operating expenses. Note that Altice’s consolidated financial statements don’t tell us much about Teads’ balance sheet in those years.
Notably, Teads’ F1 filing in July 2021 is in USD and happens to provide detailed balance sheet information for FY19 and FY20, which is critical to estimate invested capital, ROIC, and free cash flow.
So, in our revised model here’s what we did (see summary table below):
Flipped the F1 filing into Euros giving us a pure view of revenue growth across all historical years. Data from the F1 filing is converted from USD to EUR at the average exchange rate in those years.
Revised methodology to estimate invested capital in FY21 to FY23 given the lack of balance sheet line item data for Teads in Altice’s consolidated reporting.
Teads runs a Phantom Stock Appreciation Right Plan (PSAR Plan) for the managers of Teads. The total value of the PSAR Plan was estimated at €77.4 million in Altice’s FY23 Consolidated Financial Statements. This amount needs to be subtracted from our resulting equity valuation (see valuation stack below).
Assuming Teads grows at the same rate as the overall digital ad market over the coming years, which it has failed to do in recent years, and maintains those very healthy ~40% EBIT margins and ROIC margins above 25% as it has historically done, then it’s worth around $1.82 billion on a discounted cash flow basis.
Valuation Summary
Gross ad spend growth for Teads was healthy over the past few years but dipped in FY23 likely due to market structural issues such as pressure on outstream video formats, signal loss, and a general flight to walled garden identifiers. According to eMarketer’s estimates, the global digital ad market grew at a 16% CAGR from FY19 to FY23 while Teads’ CAGR is roughly half at 7%.
Similar to our first cut valuation analysis, we assume 6% of the “cost of revenue” is what TTD and other adtech refer to as “platform operations” (variable costs such as hosting, data processing, compute, etc.). Separating platform operations gives us an estimate of net revenue ex-TAC and a like-for-like comparison to public adtech companies.
Operating expenses consisting of R&D, Sales & Marketing, and General & Administrative were broken out in Teads’ F1 filing. These items are grouped into “staff costs and employee benefit expenses” on Altice’s consolidated financial statements. We use R&D expense from FY21/22 to estimate fully capitalized R&D and amortization expense in FY23 which leads to a minor change in EBIT margins.
Similar to our previous note, we set cash taxes at 27% in the historical and forecast. FWIW, in FY20 the actual cash tax rate after adjusting reported taxes for interest expense/income tax shields and the change in net deferred taxes, the cash tax rate was 31.9%
As you can see, Teads is very good at generating net operating profits after taxes (NOPAT) even with the recent revenue decline.
As discussed above, Teads’ F1 filing allows us to calculate invested capital for FY19 and FY20. From there, we assume the YoY growth in invested capital (change in operating working capital and capex) is 50% of the growth rate of gross ad spend.
In the end, what matters most is generating a Return on Invested Capital (ROIC) greater than the cost of capital. At an estimated 25% in FY23, Teads ROIC is superior to every public adtech player Quo Vadis tracks. And given our estimates, Teads also has an excellent track record of generating free cash flow.
All that said, the main thing to dig into is Teads fundamental growth rate — a key metric to track value creation. Ideally, you want to see fundamental growth growing above GDP growth. In FY23, Teads’ fundamental growth rate dropped into negative territory. That’s definitely something to keep an eye on.
Base Case Valuation Stack
Revenue growth fell off track in FY23, so our base model assumes Teads’ new owners (or whatever the new arrangement might turn out to be) will correct course (or cut heads) and start growing in line with the overall digital ad market.
Unless someone tells us otherwise, it seems reasonable that EBIT margins can be maintained at ~40% by correcting revenue growth and/or finding cost efficiencies.
Looking at our models of public adtech companies, and assuming revenue growth paces with the overall digital ad market, we think it’s safe to assume YoY invested capital will grow at roughly half the rate of forecasted revenue growth. In other words, if you forecast big revenue growth, you also need to forecast more investment in new invested capital.
With regard to Teads’ cost of capital, we use 11.3% — the market average across the Quo Vadis AdTech Core10 (TTD, CRTO, DSP, MGNI, PUBM, RAMP, IAS, DV, TBLA, OB).
Finally, we assume the return on new invested capital (RONIC) will be maintained at 25% noting that our model estimates 35% ROIC in the 10th forecast year (FY33).
Result: Equity Value of $1.82 billion. On a pricing basis, that’s 13x FY23 estimated EBITDA.
Worst Case Valuation Stack
What if revenue continues to deteriorate over the next few years before finding terra firma? Let’s assume Teads grows at half the market rate over the next two years and then starts to grow with the overall market but at 30% EBIT margins. Now the company is worth “just” ~$1 billion or 7.5X FY23 estimated EBITDA.
Either way, Altice gets something in the range of a good return to a great return if the deal terms make sense.
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.