Shutthiphong Chandaeng
Overview
My recommendation for DoubleVerify (NYSE:DV) is a buy rating as growth momentum continues to be strong and I expect it to uphold itself over the foreseeable future. There are visible growth catalysts that are supporting overall growth here, which I believe are structural growth drivers. Note that I previously gave a buy rating for DV due to my optimistic view that growth will continue at a high rate.
Recent results & updates
3Q23 was a very solid quarter for DV. Total revenue grew 28%, reaching $144 million. The strong growth was boosted by Activation revenue growth of 31% to $81.7 million, and Measurement revenue growth of 32% to $51.3 million. Operating metric was incredibly strong across the board as well, showing little signs of momentum easing. For instance, Media Transactions Measured [MTM] for Social and CTV increased by 61% and 29%, respectively, during 3Q23. Notably, growth was profitable, with adj EBITDA margin hitting $45.6 million at 31.7% and strong net income performance as well, reaching $13.3 million, the highest it has ever been since 2018.
There was nothing to complain about this quarter; it was perfect, in my opinion. I am now even more optimistic about the growth outlook as the macro situation is not affecting DV as much as I thought. Using the pace of rate hike as an indicator of macroeconomic health, the pace of rate enhance has slowed down a lot compared to the start of the year. At the current stage, I would say the macroeconomic situation is more or less stabilized. My view is confirmed by management comments during the call, when they mentioned that their view of FY23 at the start of the year was “not great,” but has changed to a much more positive view as things have improved throughout the year. Management now feels much more confident than at the end of last year. While this is not a qualitative data point that one plugs and insert into an Excel assumption, the change in tone is very encouraging and provides optimism that growth can continue to uphold at this high rate. Looking ahead, there are two very strong growth catalysts that I believe will continue to preserve growth.
Firstly, I think the increasing utilization of short-form videos is a major tailwind. Management specifically called out short-form video as a driver of 3Q23 social revenue, which grew 56% y/y, a steep acceleration from 32% in 2Q23. Some might say this short-form video is a fad, but I think this is going to stay. There is enough evidence across the globe that indicates a growing interest in short-form videos, such as YouTube Shorts, TikTok, and Meta Reels. Let me remind you that TikTok grew its revenue by 100% in 2022, reaching $9.4 billion, and is expected to reach 2 billion monthly active users by 2024 (the current 1.5 billion in 2023). Clearly, the underlying demand for short-form video is very strong. I expect short-form videos to continue to be drivers of growth moving out of 2022 and into 2023. There is also reason to believe this trend will last for a very long time, and this has got to do with demographics. Unlike previous generations, the younger generations grew up in a world of convenience. A few taps on the phone bring you food, taxis, hotel bookings, plane tickets, and many other things. This shapes their mindset to do things quickly and efficiently. In other words, their attention span is likely to be a lot shorter as well, which is why short-form video works because it is short.
Secondly, I cannot miss talking about generative AI, as it has opened up the floodgates for more “creators” to create more content. More content means a greater need for checks, and more checks mean that DV will become more relevant. The reason for more checks is because there will be more questionable materials that might infringe on certain regulations that marketers want to avoid. As such, advertisers will need to work with DV to address this.
Overall, I am increasingly positive that DV’s growth will continue at this rate, especially as it continues to roll out new products to solidify its competitive positioning. The long-term secular tailwinds remain intact with increasing penetration of short-form videos, brand safety, and generative AI-curated content.
Valuation and risk
Author’s valuation model
According to my model, DV is valued at $51 in FY24, representing a 55% enhance. This target price is based on my positive growth forecast of 26% for FY24 and FY25, as I expect growth momentum to continue, supported by the major tailwinds I discussed above. Management FY23 adj EBITDA guidance also prompted me to enhance my EBITDA margin expansion expectations, as the higher growth should drive a faster pace of margin expansion. DV historically trades at 29x forward EBITDA, and I was hesitant to assume multiples to re-rate to the average because of macro concerns. Now that DV has shown that strong growth can be sustained, I am inclined to believe that the market will re-rate its valuation if DV continues to grow.
That said, I could be wrong with the macro outlook, as things could get a lot worse if the Fed decides to resume their previous rate hike. While the underlying secular tailwinds are very strong, an overall weak economy would naturally reduce aggregate advertising spend, which would hurt the demand for DV solutions.
Summary
DV 3Q23 verified my view that growth momentum can continue. The robust 28% revenue enhance in 3Q23 illustrates an impressive operational momentum with adj EBITDA hitting $45.6 million. Management’s positive outlook for FY23 and the changing macroeconomic landscape advocate bolster my confidence in DV’s sustained growth. Significant growth catalysts include the rise of short-form videos and generative AI fostering increased content creation
