Viant: Attractive Price Level With Decent Upside Potential (NASDAQ:DSP)

Viant (NASDAQ:DSP) is a people-based technology advertising company developing a platform for marketers to use first-party data for customer targeting.

Share performance has been lackluster. Having gone public at a price of $65.5 in 2021, DSP trended down sharply for the rest of the year, before moving sideways between $4 – $5 until the end of last year. Though the stock seems to have gained some momentum YTD with the stock seeing 58% return so far, DSP still has lost over 84% of its value since going public. Today, DSP trades at $10.2.

I initiate my coverage with a buy rating. My 1-year price target of $13.2 presents a 29% upside from the current price of $10.2.

Financial Reviews

Fundamentals are average but improving. Revenue generation has been choppy since IPO. For instance, revenue declined by over 12% last year, though DSP bounced back and delivered over 13% growth in the most recent FY 2023. With a revenue of $222 million in FY 2023, DSP still has not surpassed its FY 2022 revenue of $224 million.

Despite lacking GAAP profitability, one positive thing I have noticed in DSP is the ability to generate positive operating cash flows / OCF. With the exception of 2022, when DSP saw a decline in its overall business, OCF generation has been relatively steady and on an upward trend. In FY 2023, DSP delivered over $37.8 million of OCF, a 31% increase from that of 2022. Meanwhile, GAAP net loss margin has also improved considerably in FY 2023 and inched closer towards breakeven.

Since receiving over $200 million of cash at the time of its IPO, DSP has spent some of the proceeds on share repurchases as well as technology developments. Nonetheless, these activities are also offset by OCF generation. With the relatively steady OCF generation, DSP has decent liquidity overall. Cash and short-term investments have been steady above $200 million since IPO, even during the downturn in 2022.

Catalyst

Overall, I believe that DSP will continue to benefit from the secular industry shift towards first-party data marketing approach, driven by the increasing marketing data privacy regulations globally.

Effectively, the more stringent data privacy regulations have resulted in the anticipation of a cookieless future. This means that the traditional way of doing performance marketing by relying on third-party data such as browser cookies to target audiences will continue to face limitations going forward. However, the shift provides an attractive business opportunity For DSP. DSP offers a platform that allows marketers to do performance marketing by leveraging first-party data from alternative channels, such as connected TV / CTV, digital billboards, desktop/mobile, or even streaming audio.

Given the early stage of the broader industry shift, I believe there are still a lot of growth opportunities to capture in 2024 and beyond. As of Q3 2023, cookie-based ads still remained the most dominant items within many programmatic advertising platforms’ inventories. However, the mix will soon be shifting in favor of cookie alternative items in the near term, in my opinion. An important milestone that many industry players are highly anticipating that should accelerate such a shift will be the deprecation of third-party cookies in Google Chrome, the world’s most popular browser, in 2024.

In the near term, I also believe DSP is in a highly strategic position to benefit from the shift due to its recently launched CTV Direct Access offering. With digital audiences also shifting towards non-linear TV programming such as Video on Demand / VOD, I would expect CTV advertising to continue to see growing popularity in 2024 and beyond. Netflix has also recently launched its ad-based subscription plan across select geographies, while in FY 2023, CTV was already the largest channel for DSP:

One of the notable highlights from the fourth quarter was our strong double-digit growth in Connected TV, representing almost 40% of total spend on our platform, our largest channel in the quarter. Our success with CTV is being driven in part by our Household ID technology that allows advertisers to achieve targeting and attribution in cookie-free environments, which is particularly critical for Connected TV

Source: Q4 earnings call.

Moreover, the Direct Access offering also benefits advertisers by removing the digital intermediaries by partnering directly with CTV publishers, effectively creating cost benefits for advertisers:

Direct Access: Our supply path optimization program that launched in 2023 creates a more cost efficient, direct path to premium inventory through partnerships with leading CTV publishers and the removal of resellers from the digital supply chain.

Source: 10K.

Risk

I believe risk remains moderate. Given the growing importance of multi-channel performance marketing leveraging first-party data that also comes with complexities in managing the performance effectively, I view increasing competition as a potential key risk to my thesis.

Within the space, there are larger competitors with more resources to develop stronger and more comprehensive marketing platforms, such as Trade Desk (TTD) or Criteo (CRTO), in my view. Moreover, some of these competitors are also probably better choices for certain advertisers in specific verticals. Criteo, for instance, could potentially be a stronger choice for e-commerce companies since it relies more on shopper IDs to create first-party data.

Furthermore, another risk factor to consider would be the potentially limited TAM expansion in CTV ads. While leading streaming platforms like Netflix or Amazon Prime have already launched an ad-based subscription plan, there is an option to remove ads through upgrading to higher-tier plans. This means that the higher ARPU users that would prefer higher-tier plans and are prime targets for advertisers will be excluded from viewing the ads, limiting the upside for DSP.

Valuation / Pricing

My target price for DSP is driven by the following assumptions for the bull vs bear scenarios of the FY 2024 projection:

1. Bull scenario (50% probability) assumptions – I expect DSP to achieve an FY 2024 revenue of $268.7 million, a 20.6% growth, in line with the market’s estimate. I assign DSP a forward P/S of 1x, which implies a share price appreciation to $16.3. In this scenario, I would expect the continued success in CTV advertising to continue, driven by the Direct Access offering. Accordingly, the P/S breaking 1x level last seen in 2021 also suggests the early comeback of market’s confidence in the stock.

2. Bear scenario (50% probability) assumptions – DSP to deliver FY 2024 revenue of $248 million, missing the low-end range of the market’s estimate of $250 million. In this scenario, I expect DSP to see a correction to $9.9, given the growth deceleration to 11%.

Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $13.2 per share, presenting a potential upside of 29% from the current level. At this point, I would give the stock a buy rating.

Conclusion

DSP is in a good position to capture secular growth opportunities from the shift towards cookieless advertising with first-party data sets. DSP’s relatively solid offering leverages multiple channels such as CTV, desktop, or mobile to target customers based on a single ID, which serves as first-party data. Increasing competition remains a key risk, though the recent solid CTV ads uptake suggests a promising outlook. At $10.2 today, I conclude that DSP could present an attractive buy opportunity. My 1-year price target of $13.2 implies a 29% upside. I rate the stock a buy.