Have you ever heard of DoubleVerify? A high-growth, profitable software name with bright future prospects

While AI presents significant growth opportunities across various industries, it also introduces serious threats to the internet as we currently know it. Bad actors use AI to increase fake traffic to sites, create fraudulent accounts on ad exchanges, and develop sophisticated bots to falsify impressions and attract ad dollars. This scenario poses a significant threat to the digital ad industry.

DoubleVerify ($DV), a relatively unknown software name, protects the ad industry from these risks, and demand for its platform is soaring. The company is growing rapidly and profitably, with significant prospects for continued growth.

DoubleVerify went public in early 2021. With a stock price hovering around $36 per share, DV is still trading close to its IPO price of $27, making it an attractive long-term investment. Let's take a deeper dive.

Solving One of the Digital Ad Industry's Biggest Problems

As ad dollars increasingly shift online, advertisers seek confidence that their ad spend yields a solid ROI. Achieving this is only possible if ads are viewed by real people, a guarantee that's not always present in the digital age where scammers create fake traffic to attract ad dollars. A recent report said that the ad industry lost $143 billion in 2022 on fake traffic. Over 40% of all online traffic is fake, meaning it's generated by bots, click farms, or other forms of fraudulent activity designed to artificially inflate website traffic. In the AI-powered world, the sophistication of fake traffic is expected to rise, increasing risks for the digital ad industry.

Another significant concern for advertisers is the association of their ads with inappropriate content, such as fake news or extremist material. This poses a serious reputational risk. For instance, IBM ceased advertising on X, formerly Twitter, after discovering its ads adjacent to pro-Nazi content. Such instances underscore the delicate balance brands must maintain in the digital space, where misplaced ads can quickly lead to negative public perception.

In this complex environment, DoubleVerify offers the solution. The company's role is to ensure that advertisers' spending leads to genuine user engagement, safeguarding their investments from digital fraud. DoubleVerify’s software assesses the authenticity of ad views, maintains brand safety, and evaluates ad effectiveness in real-time.

The core of DoubleVerify's offering is the DV Authentic Ad, a metric ensuring that ads are placed in a fraud-free, brand-safe, viewable, and correctly targeted environment. This tool is particularly crucial in differentiating between genuine and fraudulent online interactions. Through its DV Authentic Attention solution, DoubleVerify provides insights into how users interact with ads, guaranteeing that the message reaches the intended audience in the right context.

Also, DoubleVerify's Custom Contextual solution enables advertisers to align their ads with suitable content, adapting to the growing need for privacy-respecting advertising methods. This feature is essential, given the increasing consumer focus on privacy.

DoubleVerify operates in a large and expanding market. Digital ad spending is expected to top $871 billion by 2027, up 45% from 2023. The increasing focus on ad quality and effectiveness will directly benefit DoubleVerify, the leader in this space. Its biggest competitor, Integral Ad Services ($IAS), is growing more slowly, despite being smaller and less profitable. This indicates that DV offers a superior product and benefits from strong demand and the scalability of its platform.

Strong Top & Bottom Line Performance, & Solid KPIs

DoubleVerify is platform-agnostic. Its software is integrated across the entire digital advertising ecosystem, including programmatic platforms, social media channels, and digital publishers. This makes DV resilient in the dynamic digital ads space, as its performance is not tied to any specific platform, customer, or publisher.

DV has over 1,000 customers diversified across major verticals, with none accounting for more than 10% of its revenue. This diversification further decreases the company’s risks.

DoubleVerify earns revenue by charging a Measured Transaction Fee (MTF), a fixed fee per thousand media transactions measured. While short-term drops in digital ad transactions might negatively impact the company, the fixed fee model provides predictability to DV’s revenue model, as it’s not subject to the fluctuations of industry CPMs.

In the most recent quarter, revenue grew 28% y/y to $144 million, accelerating from 22% growth in the previous quarter. For Q4, the company projects continued acceleration, with revenue expected to grow 29% y/y. In comparison, Integral Ad Services only increased its revenue by 13% y/y to $114 million in the same period, indicating a loss of market share in the digital media measurement and analytics space, while DoubleVerify is gaining market share.

The rise of AI might be one reason for DoubleVerify’s accelerating growth, as generative AI increases questionable content, driving demand for ad measurement and verification platforms like DV.

DoubleVerify is seeing strong demand from both new and existing customers. Its Net Retention Rate of 127% in 2022, up from 126% in 2021, is a notable achievement, especially as 2022 was challenging for the ad industry due to inflationary pressures and macro uncertainties. Most ad tech stocks, including Meta and Google, tumbled. Yet, in that year, DoubleVerify managed to grow its revenue from existing customers, verifying the resilience of its fixed-fee revenue model.

The company is not only growing rapidly but also very profitably. In Q3, DV delivered an adjusted profit margin — excluding stock-based compensation and other non-cash expenses — of 32%, up from 30% in the same quarter the previous year. With the exception of product development costs, all other operating expenses increased at a slower rate than revenue, leading to increasing operating leverage. Given that existing customers significantly contribute to DV’s revenue growth, its operating leverage and as a result, its strong profitability are likely to continue improving.

What About Valuation

DoubleVerify and its biggest rival IAS went public around the same time in 2021, but at very different valuation multiples. Today, DV is trading at a P/S multiple of 11.6, more than double IAS’s multiple. The premium is justified given DV’s significantly faster growth rate and higher profitability.

Analysts expect DV's revenue to grow 24% in 2024 to $707 million. Assuming the P/S ratio remains around 12x, which is reasonable for the company, DV stock could rise 37% from current prices and reach $50 by the end of the year.

What Else

DV is a promising growth stock with a history of high growth and profitability, a rare combination in the high-growth tech space. While its fixed-fee revenue model is relatively stable and predictable, as it doesn’t rely on ad prices, the company still faces risks, including potential new competitors. If ad tech giants like Meta and Google launch their own comprehensive ad verification tools, they might erode some of DoubleVerify's market share. However, DoubleVerify could maintain a competitive advantage thanks to its platform-agnostic structure. Its reasonable valuation and solid growth prospects, make DV a good buy at current prices.

DOUBLEVERIFY RATING

Short Term: Buy

Long Term: Buy

🎯 FY2024 Price Target: $50

Today I increased my positions in Duolingo ($DUOL) and SuperMicro ($SMCI).

I’m long DUOL, SMCI.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.