Perion Network (PERI 1.33%) has been a surprising winner in the ad tech industry in recent years. In fact, according to the company, it was the only one of 52 ad tech stocks to post a gain in 2022.
The Israel-based, small-cap company has gained market share thanks to innovative premium advertising products and its intelligent hub, which efficiently connects ad buyers and sellers.
That strength was on display in the company's recent earnings report. Fourth-quarter revenue rose 33% to $209.7 million, driving adjusted earnings per share up 45% to $0.90. Both numbers easily beat analyst estimates.
Revenue growth was led by its search segment, where sales rose 49% to $85.9 million. Management said demand for direct-response for advertising was strong since advertisers tend to shift resources to search in difficult macroeconomic environments like the current one.
In spite of the strong results, the stock actually fell on the news, declining 8% on Feb. 8, though it has since recouped most of that loss. The decline could be because the company offered conservative guidance for 2023, forecasting revenue growth to slow to 14%, or because CEO Doron Gerstel is stepping down after a successful run, to be replaced by Tal Jacobson, who currently runs the company's search advertising business, CodeFuel.
The growth in Perion's search business is primarily driven by Microsoft's (MSFT +0.06%) Bing, with which Perion is a preferred partner. With the recent announcement of Microsoft's new ChatGPT-powered Bing, Perion could be a big winner.
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What the new Bing could mean
On the recent earnings call, Gerstel discussed the implication of ChatGPT, saying: "With regard to search, our expectation is that ChatGPT will revolutionize Bing search capabilities by providing more advanced and intuitive search experiences for its users, better meeting their needs and expectations. We believe that such superior search results will increase advertiser spending, and as a result, we expect to see a very positive impact on our search business."
The ChatGPT-powered Bing hasn't been made available to the general public yet, but at the very least, it will likely drive more attention to Microsoft's search engine as chat represents the new frontier in search.
Perion's technology helps Bing advertisers better monetize their ads on the platform, and Perion earns revenue share from ad clicks on the search engine. Because of that direct relationship, Perion will benefit as Bing earns more search traffic.
In Microsoft's own presentation on the new Bing last week, Chief Financial Officer Amy Hood said that for each additional percentage point of market share Bing earns, it gets $2 billion more in revenue. For Perion, that could translate into tens of millions or even hundreds of millions of dollars more in search revenue, since Gerstel explained on the call that he's expecting Bing to attract more and higher bids from advertisers as it rolls out enhanced search capabilities.
Its relationship with Microsoft also seems strong as Perion was named Microsoft's Advertising Global Supply Partner of the Year. Its current contract runs through the end of 2024.
NASDAQ: PERI
Key Data Points
What's next for Perion
With Gerstel set to step down later in the year, 2023 will be transitional for the company, and despite its conservative guidance, it still seems well-positioned to deliver solid growth this year.
In addition to the momentum from ChatGPT, the company is gaining traction from its cookie-less technology SORT, which drives a click-through rate of 1.33%, nearly triple that of the Google benchmark at 0.46%. It also continues to see momentum in connected TV as CTV revenue jumped 108%, helped by the company's innovative picture-in-picture advertising during live events like sports.
There's also the potential for the company to drive growth in the business through more mergers and acquisitions. On the earning call, management said that its 2021 acquisition of Vidazoo, a video-monetization platform, has driven significant growth -- and at great value, since Perion acquired it for just 6.5 times Vidazoo's earnings before interest, taxes, depreciaion, and amortization (EBITDA).
Investors might have been surprised to see Gerstel stepping down, but given Jacobson's background in search advertising, he seems like a good fit for the current moment.
With momentum in a number of growth areas and the coming release of the new Bing, Perion seems well-positioned to continue growing. And the stock trades at a price-to-earnings ratio under 16, which seems dirt cheap considering its track record and growth prospects.
Perion doesn't need the new Bing to succeed, but if it does, this overlooked ad tech stock could really take off.
