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The following segment was excerpted from this fund letter.
Tremor International Ltd. (NASDAQ:TRMR)
Mittleman Investment Mgmt. (MIM) established a new position in the U.S.-listed ADRs of Tremor International Ltd., a significant player in the ad tech space. Based in Tel Aviv, Israel, and with its primary listing in London (1 ADR = 2 London-listed shares), but with over 90% of its sales from the U.S., MIM considers Tremor a U.S. business in terms of geographic exposure.
The “tech-wreck” of 2022 saw many former high-flyers crash down from incomprehensible valuations to become priced now more reasonably. But Tremor was already cheap as the year began and as it went down further, it just became too cheap to ignore. MIM paid $8.64 per ADR on average, about 3x its estimate for ’23 EBITDA of $175M (TRMR’s est. of $200M, minus stock-based comp.), and 5x FCF of $100M (MIM’s estimate), for a leader in a high-growth industry (digital advertising), with a 35%+ EBITDA margin, and a net cash balance sheet, in a rapidly consolidating field.
MIM sees TRMR’s fair value as 8x EBITDA or 15x FCF, plus $110M in net cash, for an initial target of about $20 per ADR, which is 2.3x MIM’s cost basis. If historical growth continues that number will prove conservative. If a recession occurs and ad spending drops further, it may be optimistic for the next year or so. Most ad-supported businesses reported disappointing results recently, so the near-term risk is that the business takes a step backwards before resuming its longer-term growth trajectory.
But the fast-growing market for digital ads is unlikely to stall for long, and TRMR’s services address a very large market, where market share is actually shifting away from the “walled gardens” of the dominant players like Google and Facebook, and more towards the “open internet”, as well as connected TVs (“CTV”). Tremor’s services increasingly have somewhat of a SaaS (Software as a Service) profile, but the stock lacks anything close to a SaaS valuation premium.
The largest player in Tremor’s industry, The Trade Desk (TTD, $43.72), is one of the only companies getting a premium valuation (10x sales, 26x EBITDA) in that field, and it may well deserve it given its first mover advantage and outstanding growth record in a business where scale begets scale. But MIM doesn’t see this industry as a “winner takes all” opportunity, nor suggests a premium valuation for TRMR, as just getting to a somewhat normal valuation should be a satisfying outcome, plus whatever growth the business likely generates over time.
And what exactly is this business? Ad tech companies like Tremor offer “programmatic” ad buying/selling, which is fully automated using AI and algorithms, providing better targeting, better returns on advertising money spent, and all done in milliseconds. Tremor operates both on the demand side for advertisers buying ads (DSP, Demand Side Platform) via their Tremor Video and recently acquired Amobee DSP, and also on the supply side via their Unruly SSP (Supply Side Platform) which sells ad space for publishers like News Corp. (which sold Unruly to TRMR).
Providing “end-to-end” service is a differentiator for TRMR which competes with DSP-only firms like Trade Desk and SSP-only firms like PubMatic. Besides Tremor, there are only three other companies offering two-sided or end-to-end platforms and those are Perion, Outbrain, and Taboola, but the latter two are performance based (paid for clicks). Ad tech firms like Tremor and Perion take a percentage fee (their “take rate”) of the ad spending on their networks and report revenue on a net basis as “Contribution Ex-TAC” where TAC means Traffic Acquisition Cost.
Technology-based businesses like Tremor have unique risks, particularly with regard to intellectual property and potential technological obsolescence. However, at 3x EBITDA, with a net cash balance sheet, 35% EBITDA margin, and having established meaningful scale and scope in a huge, fast-growing addressable market, MIM thinks this is a wise risk/reward ratio.
Tremor is just one of many new opportunities the recent market sell-off has presented, and MIM is constantly evaluating those as potential new additions to the portfolio. As the portfolio’s characteristics imply, it’s a fairly high bar for entry in terms of business quality (most of MIM’s holdings in top 3 from a market share perspective) and valuation.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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