Description

Thesis Overview

Integral Ad Science (IAS) is a market leading provider of ad verification and brand safety solutions to the digital advertising ecosystem.  IAS’s software enables advertisers to ensure their digital ads are viewable by the consumer, seen by real people not bots, and served adjacent to brand safe and contextually relevant content.  Ad verification is a niche sector with two key competitors, IAS and DoubleVerify (DV), both of which are small, PE-backed companies that IPO’d in 2021.  Investors are currently struggling with how to value these businesses amid a slowdown in the digital advertising market.  Although IAS is levered to digital advertising spending, the key revenue driver is digital ad impressions which should be less cyclical than digital advertising spending when combined with a stable CPM. 

IAS is benefitting from several multi-year secular growth trends I expect to fuel double digit revenue growth for the next 3+ years.  Digital display and video advertising continues to grow double digits as advertisers shift spending from poor performing traditional media with declining engagement to digital channels.  Verification is underrepresented in social which is at an inflection point given recent rollout of live feed products for TikTok, Facebook, Instagram and Twitter.  CTV represents a nascent market opportunity for ad verification and IAS’s recent acquisition of Publica positions them as a leader in the rapidly growing CTV market.  Finally, Oracle MOAT, the third largest player in the market, recently announced they are exiting the business.

As these growth drivers take hold, I expect IAS’s revenue growth to reaccelerate back to the high-teens.  Combined with strong FCF generation and incremental margins >40%, this should drive 20%+ EBITDA CAGR over the next 3 years.  Assuming IAS can rerate to the historical median multiple of 13x EBITDA, I see 150% upside to $27 target price over the next 2-3 years. 

Business Description

IAS is one of the leading players in a niche but rapidly growing ad verification software market.  The software is used by both advertisers and publishers to ensure digital ads are viewable, seen by real people as opposed to bots, and served alongside content that is suitable and safe for the brand.  By placing a digital tag inside of the display ad, IAS’s platform receives real-time information from the publisher including content on the page, location of the ad, and viewer behavior.  That data is then analyzed by IAS’s algorithms to determine if it meets the advertiser’s requirements and reported back to the customer.  IAS’s advertiser solutions can be delivered on either a post-bid reporting basis (“measurement”), or a pre-bid filtering basis (“optimization”).  Verification enables advertisers to reduce spend on fraudulent, non-viewable or unsafe digital ads, thereby having a direct and measurable improvement on return on ad spend (ROAS) for their customers.  More recently IAS has leveraged their brand safety algorithms to enable contextual targeting and contextual avoidance solutions for advertisers as an alternative to cookie-based targeting.

The industry is concentrated, with three primary competitors being IAS, DV and MOAT, which was acquired by ORCL in 2017.  In June, Oracle announced their intention to exit the advertising business by September 30, 2024, solidifying the duopoly market structure.  IAS was founded in 2009, acquired by Vista in 2018 for $850M, and taken public in June 2021 at $18/sh.  Vista still owns 40% of the equity and retains control of the board. 

In 2023, IAS generated $474M of revenue, $160M of EBITDA (34% margin) and $98M in FCF.  87% of revenue is generated from advertisers and 13% from publishers.  Of the advertiser revenue, 55% is optimization revenue and 45% is measurement.  IAS is geographically diversified with 70% of revenue from North America, 24% EMEA and 6% APAC.

Thesis Detail

Less cyclicality than market fears.  Although IAS is not immune to cyclical slowdown in the digital advertising market, I expect IAS revenue to be much more resilient than overall digital advertising spending.  IAS’s revenue model charges a flat CPM (which has grown over time with the introduction of higher value add products) times the number of impressions verified.  As digital advertisers cut back on ad budgets, supply/demand dynamics in digital ad marketplaces deliver more variability in ad CPMs than the number of impressions served.  Further, IAS’s exposure to larger brand advertisers should also prove more stable than the long tail of SMB digital advertisers.

Untapped growth opportunities not yet appreciated by investors.  IAS is at the precipice of multiple significant market-expanding business opportunities that are not currently contemplated in consensus expectations.  The company recently built an ad verification product for the live feed of TikTok that was rolled out globally throughout 2023.  TikTok generated >$13B in ad revenue in 2023 and is growing >30% y/y.  Following pressure from large brand advertisers, META launched ad verification on reels and the live feed in 1H24.  Combined, I think TikTok and Facebook live feed represent an incremental $200-$300M revenue opportunity for IAS over the next 3-5 years.  CTV is another $20B ad market in the US growing ~30% y/y, and CTV advertisers are just beginning to adopt ad verification.  I think CTV can represent another $80M revenue opportunity over the next 5 years.  Lastly, Oracle’s shuttering of the third largest player in the market with an estimated $80M in revenue is up for grabs for IAS and DV.  Combined, I see $300-$400M in incremental revenue opportunities for IAS.

Higher quality business than perceived.  Ad verification is very different than most other ad tech business models the public markets have seen over the years.  The business model is not directly tied to digital advertising spending as described above.  Whereas most ad tech businesses have benefited from an arbitrage or spread between the price paid for digital ads and the price sold (that ultimately get compressed as markets become more efficient), IAS is not earning a spread on advertisers’ media budgets.  Ad verification provides a discrete, measurable ROAS uplift for advertisers.  Verification is also not likely to be disintermediated by the large walled gardens since the value proposition is inherently linked to being an independent third party.

On the Q4 earnings call, IAS management discussed offering price concessions for a handful of large customers in exchange for higher volume commitments and multi-year contract renewals.  This stoked fears of a price war and sent shares of the stock down >40%.  Research suggests there is no material change in industry pricing dynamics.  IAS and DV have historically offered volume-based pricing discounts whereby customers pay a lower CPM for higher volume commitments.  This deflationary pricing has been more than offset by the introduction and increasing attach rates of new higher priced products.  With the imminent launch of META live feed representing a massive volume opportunity for IAS, it is not surprising to see the company offer lower CPMs in exchange for higher volume commitments.

The company’s disclosures around pricing suggest no material change in pricing trends relative to history.  In fact, pricing growth has reaccelerated in Q2 to +2% y/y, in line with the long-term CAGR.

Performance gap vs. DV overly discounted by the market.  While DV has outgrown IAS by ~8% since 2019, I believe this is due to a confluence of factors, some of which may resolve going forward.  DV was first to market with their programmatic product by ~1 year, gaining scale more quickly than IAS in a rapidly growing segment of the market.  IAS also has more international exposure, accounting for 30% of revenue compared to ~10% for DV.  Given the macro weakness in Europe in 2022-2023 and the strengthening of the USD, international revenue has been a drag on growth for IAS.  Over the past two quarters, the revenue growth gap has closed significantly, with IAS modestly outpacing DV in Q2.  If this continues, I think the market debate around share losses vs. DV will abate and IAS’s multiple stands to gain considerably.

Catalyst

Beats and raises