Shutthiphong Chandaeng
Intro
Perion Network (NASDAQ:PERI) is a global technology company that operates in the digital marketing industry, providing advertising and marketing solutions to businesses, helping them reach their target audiences more effectively in the online space. The company operates two revenue streams: Display advertising and Search advertising. For additional context, display advertising involves visually engaging elements like images and videos to promote products or services online, resembling digital billboards to capture attention during web browsing. Search advertising, on the other hand, strategically positions text or visual ads within search engine results, ensuring businesses appear prominently when users seek relevant information, directing potential customers to their offerings.
As of the end of 2022, display advertising represented 56% of PERI’s total revenue, with search advertising making up the remainder. While PERI is a global business, we note that the majority of its revenue comes from within the United States, with 86% and 89% of search advertising and display advertising revenue being generated in North America in 2022, respectively.
Fortunately for PERI, the two primary markets it operates in present massive opportunities long-term. In Figure 1 below, we point out that combined, the North American search advertising and display advertising markets grew at an 18% CAGR from 2019-2022, up to nearly $175 billion, with PERI representing less than a half percent of the total market. Looking ahead, the industry is expected to continue experiencing strong growth, reaching roughly $232 billion by 2025, representing a ~10% CAGR from 2022 levels. Given the market’s sheer size, combined with PERI’s strong competitive positioning within the space, we believe it is very likely that PERI will continue winning share in outer years.
Over the past year, shares of Perion Network have been flat, versus the S&P 500, which has soared nearly 23% in the same time period. Given its solid fundamental profile, we view its recent underperformance as a solid entry point for investors, particularly if the Fed decides to lower interest rates in 2024, which would likely free up capital for advertising. At current valuation levels, PERI presents a compelling investment opportunity, showcasing significant potential for share appreciation both in the upcoming twelve months and over the long haul. We assign PERI a Buy rating and price target of $46, suggesting ~62% upside from its current share price.
Figure 1 (Loft Capital Mgmt., Statista, Seeking Alpha)
Financial Performance
Perion Network continues to deliver solid financial results quarter after quarter, despite what its recent share price performance may suggest. In Figure 2 below, we show that, in each of the past eight quarters, PERI has delivered top-line results at or above consensus expectations, which gives us confidence that management has strong visibility into its business. In 3Q23, PERI’s top-line expanded 17% year-over-year, which we view as solid growth given the tough macro set-up today.
Figure 2 (Loft Capital Mgmt., Seeking Alpha)
Perion Network’s bottom-line results have been even stronger, comfortably topping consensus estimates in each of the last eight quarters, as shown in Figure 3 below. In 3Q23, PERI’s adjusted EPS grew 39% year-over-year, up to $0.84, and we believe the company is well-positioned to unlock further earnings growth in outer years as it continues to drive leverage in its business model and diversify its revenue streams.
Figure 3 (Loft Capital Mgmt., Seeking Alpha)
In Figure 4 below, we illustrate Perion Network’s historical revenue and consensus estimates through 2025. From 2019-2022, PERI’s revenue grew at a CAGR of 35%, and while growth is expected to slow going forward, estimates indicate that PERI will expand its top-line at a CAGR of 16% from 2022-2025, which we view as strong growth given the competitive environment and ongoing macro headwinds.
Figure 4 (Loft Capital Mgmt., Seeking Alpha)
Similarly, outlined in Figure 5 below, PERI has enjoyed healthy earnings growth over the years, with trends expected to continue in outer years. From 2019-2022, PERI’s adjusted EPS grew at a CAGR of 44%, with expectations that EPS will expand at a 14% CAGR through 2025. While we view this as solid growth regardless, we see upside to numbers over time as PERI has consistently demonstrated its ability to grow profitably, even in spite of macro challenges. Likewise, Perion Network continues to drive growth through innovation; it recently introduced WAVE, a new advertising solution for dynamic audio ads driven by generative AI, designed to enhance personalization and engagement in the growing U.S. digital audio ad market.
Figure 5 (Loft Capital Mgmt., Seeking Alpha)
Given the challenging macro backdrop, we find it valuable to point out PERI’s strong liquidity position, as outlined in Figure 6 below. The company has $525M in cash and short-term investments and no long-term debt, is extremely profitable, and growing. We believe PERI presents a great mix of profitability and growth today, particularly for those investors who are more risk averse.
Figure 6 (Loft Capital Mgmt., Company Filings)
Valuation & Estimates
In Figure 7 below, we see that PERI is trading at a P/E of 9x today, roughly 26% below its five-year average of 12.1x.
Figure 7 (Loft Capital Mgmt., YCharts)
When comparing Perion Network to its industry peers (see Figure 8 below), we see that PERI is trading at a roughly 70% discount on a price-to-earnings basis. While we understand that a discount may be warranted given PERI’s slower growth relative to its peers, we believe the discount is well overdone, particularly given PERI’s strong net income margin profile relative to the comp group.
Figure 8 (Loft Capital Mgmt., Seeking Alpha)
We estimate a 2025 adjusted EPS of $3.84, roughly 4% above consensus. Applying a P/E ratio of 12x, in-line with PERI’s five-year average and a nearly 40% discount to its peer group to reflect slower top- and bottom-line growth, we arrive at a price target of $46, representing 62% upside from current share price levels. Again, we view our multiple as more than reasonable given where PERI has historically traded, in addition to its strong net margin profile, which is roughly 30% above its comps.
Figure 9 (Loft Capital Mgmt., Seeking Alpha)
In Figure 10 below, we provide a scenario analysis on price target outputs based on different assumptions for EPS growth and the multiple used for 2025.
Figure 10 (Loft Capital Mgmt.)
Risks to Thesis
While we believe Perion Network is well-positioned for strong growth and further share price appreciation going forward, we do see some risks to our thesis today. Primarily, if market conditions were to deteriorate, there would likely be less ad dollars available to go around, which presents some downside risk to PERI’s numbers for 2024 and 2025. Additionally, although the ad-tech space is massive, PERI does compete with some of the world’s most prominent tech companies, including Alphabet (GOOGL) and Meta Platforms (META), which could make it more difficult to gain additional share over time, potentially creating a drag on PERI’s stock price. Fortunately for PERI, the company is already extremely profitable, and growing, unlike many young businesses in the space, which gives us confidence that it can continue to win share and experience solid share price appreciation in future years.
Final Thoughts
Given its enormous TAM, strong balance of profitability and growth, and attractive valuation at current levels, we see Perion Network as a solid buying opportunity in today’s market. With a diversified business model, focus on technological innovation, and robust execution, PERI’s resilience positions it favorably for long-term success, making it an attractive prospect for investors seeking stability and growth in the dynamic digital marketing industry. We assign Perion Network a Buy rating and $46 price target, suggesting 60%+ upside from its current stock price.
