The relentless pursuit of tech valuations for media

With every wave of new media, every new tech to access audiences, and every change in the regulatory/privacy landscape adtech will go through a painful rerating in the public markets. This is as far as I remember.

Depending on the phase of the cycle, adtech was an ad arbitrage business or a tech business.

We are on the cusp of another change – ad platforms jumping on the bandwagon of ‘Retail Media Networks’.

A quick history first.

‍Ad Tech - A decade in context

A decade ago, adtech companies were dominantly themed in media arbitrages rather than programmatic tech. The predictability and growth pattern of an adtech company weren’t quite the same as that of a SaaS-like MarTech company. Hence, they have for long been valued below typical MarTech entities. However, adtech companies on the programmatic platform did command higher valuations and the field saw a lot of M&A. By the end of 2017, public adtech companies came to shed their media arbitrage businesses via strategic or capitulation sale. What remained were pure-play adtech companies with improved predictability, operating leverage and growth. ‘Improved’ is the operating word. In adtech, tech was incidental and audience targeting is where the value is. It is a data business. In MarTech, the tech drives the workflow and the promise of efficient marketing throughput. Nonetheless, Adtech and MarTech companies traded at comparable valuations, post 2017.

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Back to future

Across AdTech, 90 M&A deals were struck in 2021 – a more than 200% increase from the year before.

Expert opinion is divided on what fueled the flurry of flotations in the space last year. Most adtech companies had neither the solution nor the ability to comply with the  impending laws, in the face of anticipated Apple and Google’s ID deprecations. Apple’s ATT has made the steepest cut into the adtech players yet. The Android Privacy Sandbox that enters beta testing in 2023 will complete the rest of the carnage. The SDK Runtime API will create a separate environment for third-party SDKs to run in. This essentially cuts off the ability to gather in-app data that an SDK doesn’t have permission to collect. AdTech companies had to make hay while they could and they did, opines Arete Research.

The counter argument is that most of the companies that went public during this time window were indeed profitable and hence were in the right space. “Saying adtech 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.”, says Terence Kawaja, CEO of LUMA Partners.

In 2022, the rate of adtech companies debuting on the markets tapered off along with a clear decline in public company valuations. In a research note from Arete, all 15 of the adtech companies that went public since 2020 – Viant, AppLovin, AdTheorent, AcuityAds, Zeta Global, Taboola and Outbrain included – are currently valued below their IPO price, some by as much as 90%. Macroeconomic issues governing the wider global economy is an oft-cited primary cause for this catastrophe.

The economic downturn, signal loss on mobile and the eventual phaseout of third-party cookies will likely lead to consolidation in the industry. The more the 52-week highs approach current stock prices, the closer private equity will look at some of the better assets in the space and bring their discipline playbook to bear (creating and capturing free cash flow).

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If Q4 2022 ad spending ends up lower than expected , then new lows will show up in early 2023 when full-year results for adtech reports will become available.

2023 will also see a few adtech players breaking from the pack, riding the ‘Retail Media Network’ wave. Criteo, CitrusAd, Epsilon are some of the early players. If a retailer has their own audience, they’d see the value of the networks in the infrastructure they provide and not the network itself. Such a view could actually, for the first time, put the ad platforms (or the infrastructure providers, which is a more accurate way to describe) in a position to charge subscription revenue like a software provider – ergo better revenue predictability.

That’s a wrap, for the year as well. We will skip the Christmas and New Year weekends. See you all in 2023.

The PipeCandy team wishes you a fantastic 2023 and a quiet, memorable holiday season.

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Sathish Rangarajan, Industry Analyst, PipeCandy contributed to this newsletter.

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