Should You Buy the Dip on PubMatic Stock?

Key Points

• PubMatic reported solid results, but lower ad spending from a single DSP will hit revenue in the third quarter.

• The company is working on diversifying its DSP mix and investing in high-growth areas like connected TV.

• With a strong balance sheet, PubMatic can ride out the storm.

• 10 stocks we like better than PubMatic ›

Shares of adtech company PubMatic (NASDAQ: PUBM) took a beating on Tuesday following a second-quarter report that was mostly positive, save for one piece of bad news. The stock was down more than 20% in morning trading.

Is this rout an opportunity to pick up shares of PubMatic at a knocked-down price? Or should investors steer clear?

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Plenty of good news

PubMatic, which operates a supply side platform that helps publishers and app developers monetize their content, grew revenue by 6% in the second quarter to $71.1 million. Net dollar-based retention was 102% for the trailing-12-month period, down year over year but still in expansion territory.

Connected TV was a major growth driver, with revenue up more than 50% year over year. The company now works with 26 of the top 30 global streaming companies after adding a major U.S. streamer during the second quarter. Omnichannel video, a broader category that includes CTV, grew revenue by 34% and accounted for 41% of PubMatic's total revenue.

PubMatic's Activate solution, which allows ad buyers to more efficiently buy video ad inventory, is gaining traction. Buying activity on Activate more than doubled from the first quarter, and the company noted that PayPal was a major customer taking advantage of the solution.

While PubMatic's profits declined in the second quarter, free cash flow remained healthy. PubMatic generated $9.3 million in free cash flow in the second quarter, up from $6.9 million during the prior-year period. The company's strategy of owning and operating its own infrastructure allows it to tune capital spending to reflect demand and continually unlock efficiencies. The company's platform processed 78 trillion impressions in the second quarter, up 28% year over year, and the cost per million impressions processed has dropped by 20% over the past year.

Why the stock is tumbling

PubMatic's outlook for the third quarter was lackluster, to say the least. The company expects to generate revenue between $61 million and $66 million, down about 12% year over year at the midpoint.

The main reason for the poor outlook is the expectation of a reduction in ad spending from one of PubMatic's top demand-side platform buyers. PubMatic didn't name the platform, but one Wall Street analyst pointed to The Trade Desk as a likely culprit. It's unclear whether this reduction in spending is a short-term issue, or if it will act as a headwind for multiple quarters.

PubMatic did attempt to assuage investor concerns by detailing its efforts to diversify its DSP partner mix. Ad spending from performance marketers and mid-tier DSPs rose by more than 20% in the second quarter. Going forward, the plan is to continue to diversify the DSP mix and reduce the reliance on a few large DSPs.

Image source: Getty Images.

Is PubMatic a buy?

While PubMatic's guidance is certainly concerning, the issues with a single DSP likely represent a temporary setback. As PubMatic diversifies its DSP mix and continues to invest in high-growth areas like connected TV, its revenue growth should become less volatile in the future.

One thing to note is that PubMatic has a rock-solid balance sheet. Cash and marketable securities totaled $118 million at the end of the second quarter, and there was no debt to speak of. That cash, plus PubMatic's free cash flow generation, gives the company plenty of breathing room as it works through the disruption caused by a single DSP.

With Tuesday's collapse, PubMatic stock is trading right around its 52-week low with a market capitalization of just $400 million. The bar is extremely low, especially considering PubMatic's cash position, and the company could scale up share repurchases to take advantage of its slumping stock price. PubMatic bought back 3.5 million shares in the second quarter alone, or about 7% of its total share count, and it could repeat that feat in the third quarter and still have no shortage of cash on the balance sheet.

While the market may be spooked by PubMatic's guidance, a strong balance sheet, owned infrastructure that's becoming more efficient with each passing quarter, and the likelihood of the company's current issues being temporary all point to PubMatic stock being a strong buy.

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Timothy Green has positions in PubMatic. The Motley Fool has positions in and recommends PayPal, PubMatic, and The Trade Desk. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short September 2025 $77.50 calls on PayPal. The Motley Fool has a disclosure policy.