Description

Without a doubt, the programmatic advertising technology ("AdTech") sector has been on fire in the public markets lately, and for some very good reasons: COVID-19 accelerated the secular shift to digital advertising as marketers funelled ad dollars to the best performing return-on-ad-spend (ROAAS) channels, eCommerce sales surged and stimulus payments buyoed consumers, and after a terrible March - May for the space, budgets quickly recovered and in many cases surpassed initial 2020 targets. 2021 appears to be set up as a recovery year with some very easy "comps" in Q1 and Q2 and continued secular tailwinds, particularly in areas of surging spend like connected TV ("CTV"). The confluence of these bullish factors has seen tier-1 AdTech assets like Pinterest, Snap, Trade Desk and Magnite (formerly Rubicon) trade up by between 2-4x from pre-pandemic levels. 

Unsurprisingly, bankers have not wasted this moment to bring lower tier AdTech assets to market, most notably with the IPO of supply side platform ("SSP") Pubmatic (PUBM) in December and now the IPO of demand side platform ("DSP") Viant (DSP) this February. Whereas the aforementioned tier-1 companies have durable moats related either to user base / 1P data (PINS, SNAP), or product and technology leadership (MGNI, TTD), we believe neither PUBM nor DSP have particularly strong technology and believe each company's extremely low level of R&D spend at ~2.5m per quarter to be reflective of such (for comparison, MGNI spends ~15m and TTD spends ~50m quarterly on R&D). Yet, while PUBM is at least outgrowing the industry (materially, its Q1 guide that is quite conservative was still set for ~40% yoy growth) on the back of what we believe to be a strong set of short-term tailwinds and robust execution, DSP is not (with a Q1 guide of 11-14% growth "ex-TAC" and 0-1% inclusive of TAC or traffic acquisition costs).

DSP's disclosures are also anemic compared to peers and its valuation is exorbitant and highly unjustified at nearly 20x ex-TAC revenues and 100x EBITDA, versus PUBM (who we believe has sandbagged to a much greater degree) at 13x / 45x and MGNI which we have trading at 15x / 50x for a much higher quality asset than Viant. Furthermore, DSP's "story" (we know that every 20x sales IPO needs one and has one), is highly dubious when compared against that of other AdTech players:

• PINS has access to a coveted demographic of in-market shoppers that are essentially building shopping lists, so costs per thousand impressions ("CPM") should be structurally high. 
• SNAP has similar access and dominates mindshare along with TikTok and IG in an extremely difficult to access demographic, and has made substantial investments in its programmatic AdTech stack that appear to be paying off. Both SNAP and PINS obviously have robust 1P data sets.
• After merging with CTV platforms Telaria and SpotX, Magnite is positioned to be the go-to source of programmatic CTV ad inventory for marketers, and is also run by one of the best CEOs in the industry in Michael Barrett. MGNI is also investing extensively in audience / ID capabilities to cope with cookie-less by leveraging the datasets of its publisher partners.
• Trade Desk has THE best CEO in the industry in Jeff Green, and is the go-to DSP of choice for all ad agencies and brands looking to transact programmatically. TTD has also built out robust identification capabilities that will prove useful in a cookie-less world and is evangelizing its universal ID, which has gained widespread acceptance by SSPs. 
• PUBM has a capable management team, is focused on the "long tail" of smaller publishers not served by Google / Facebook / Magnite and is pushing a narrative of bringing header bidding to CTV as a means to penetrate that vertical (we are skeptical).

So what is DSP / Viant's story? In a nutshell, DSP claims to have developed a superior user targeting solution as compared to TTD, LiveRamp and others that will perform well once IDFA goes into effect and cookies / mobile ID go away. Given Viant's lack of investment in R&D (again, just $2.5m / quarter) and low brand awareness of its product (branded "Adelphic") throughout the industry, we are very skeptical of these claims. TTD's universal ID and LiveRamp IdentityLink are backed by years and tens of millions of dollars of investment, and command partnerships throughout the industry, and we hear good feedback on Magnite's publisher-based audience solution too. Meanwhile the Viant / Adelphic identity solution is unproven and a version 1.0, all hype and no substance. Worse still, in dozens of industry calls and channel checks, we have never once heard of DSP or Adelphic mentioned as a leader in the industry. We have invested in this sector for a long time and track it actively (see our prior comments on the timely write-up of another VIC member on RUBI / MGNI last year), so the lack of feedback we have received on DSP for a $2.6 billion EV company is noteworthy.

The reality of DSP's business as we piece it together is (much) less exciting and warrants a far lower multiple: We believe Adelphic is a tier-2 DSP with perhaps 1 - 2 points of market share, drastically subscale as compared to Google / Amazon / Facebook and Trade Desk all of whom command double digit market shares. DSP performs well in mobile and provides good client service to smaller agencies and brands, and has a modest presence in CTV by virtue of its affiliation with streaming service Xumo, which it sold to Comcast in 2020. However, despite this connection to Comcast and we believe contrary to sell-side beliefs, DSP is not an integrated partner of Comcast's Freewheel SSP, meaning DSP is likely to actually lose share in CTV over the course of 2021.

In direct contradiction to its claims about its identity solution, our checks suggest DSP is actually overindexed to the areas of spend MOST reliant on cookies, including mobile web and app, where mobile device IDs are likely to be phased out for advertising purposes while chrome is eliminating cookies. DSP even acknowledges the risks of cookie and mobile ID deprecation in its 10-K and S-1, all while boasting that this industry shift is a positive for its business.

Lastly, while DSP called out 70% growth from CTV in Q4, the company does not break out absolute CTV revenue, so we can't even attempt an SOTP on that basis. However, the fact that DSP's CTV grew 70% in Q4 but total revenue grew only 19% ex-TAC implies that it must not be very large and / or the base business is struggling. Guidance for Q1 of 11 - 14% is, again, exceedingly poor compared to competitors. DSP wants to be compared to TTD, but TTD's business grew 48% YoY in Q4 and its CTV grew 100% on a much larger base. 

Valuation: We think Street FY22 is not far off what DSP may actually do if the identity environment does not deteriorate too rapidly (245m in headline revenues and 166m ex-TAC, with EBITDA in the $30 - $40m range). We strongly believe this asset should trade at a discount to other AdTech assets for slower growth, higher competitive risks, and lack of differentiated technology or usage. Applying 5x forward revs / 25x EBITDA gets us to $19 / share, however if DSP misses numbers at any point all bets are off. Management (CEO and COO Vanderhook brothers) also owns more than 50% of shares and are highly likely to be sellers after the 180 lock-up ends in August. 

Risk factors:

Only ~10m shares out of 60 outstanding are floated making the stock a volatile and illiquid trader and 10% moves are not uncommon. S3 short interest is currently very low however at <5% of the float and <1% of true shares outstanding. The insiders / Vanderhooks have a strong motive to keep the shares trading at high levels until they can sell in August, so that is something to be cognizant of. 

Bill Hwang could get a capital infusion and vwap the stock to $100 (somebody was definitely moving it up on no volume yesterday to paint the tape). If Nomura, Credit Suisse and Goldman file 13-Gs, consider covering the short until his next margin call. 

Catalyst

People do work and realize DSP is not what it is billed as. 

Numbers are not as sandbagged as street thinks. 

Buyside unwilling to pay 10x+ revenues for 20% growth in a commoditized space.

Lock-up.