Integral Ad Science: Decent Upside If Valuation Gap Closes Vs. Peer

Overview

I believe Integral Ad Science Holding Corp. (NASDAQ:IAS) is undervalued by at least 35%. I expect the demand for IAS product to continue growing in the coming years due to several factors, including the increase of ad fraud, the emphasis on brand reputation management, and the rapid growth of programmatic advertising. To this end, IAS offers a solution to companies to help them get the most return on investment by verifying the legitimacy of their ads and making sure they reach their intended audience in a trustworthy setting.

Business description

IAS provides third-party verification and measurement of digital advertising across various end-channels such as desktop, mobile, connected TV [CTV], and more.

Significant growth opportunities in the digital advertising industry

In my opinion, IAS is set up to take advantage of several noteworthy developments in digital advertising and changes in consumer preferences. According to Statista, the total amount of time people spend online has more than doubled in the last decade. Not only that, but forecasts show that investments in digital advertising will keep growing through 2024. I expect advertising budgets for all forms of digital media to keep growing as consumers spend more time online.

Three major developments that contribute to this trend are the decline of ad fraud, the emphasis on brand reputation management, and the rapid growth of programmatic advertising.

Ad fraud is estimated to cost $100 billion by 2023, and marketing companies are becoming acutely aware of the wasted media spend as a result. Marketing companies rely on customer feedback and data gathered to develop their marketing strategies. Hence, given the growing importance of accurate data in today’s increasingly digital world, it is crucial to improve data accuracy. Particularly as more advertisements adopt a personalized approach, which depends on accurate data.

Also, many 21st-century marketers put a premium on maintaining a positive image for their brands. There has been a recent shift toward brands caring more about aligning their advertising with content that reflects their values and goals. Marketers are taking measures to protect their brands and boost their campaigns’ effectiveness by implementing brand safety solutions that are both flexible and scalable.

Ad exchanges that use automated systems to buy and sell digital ads, known as programmatic advertising, are gaining traction. Using real-time signals, programmatic advertising has helped boost growth in recent years by aiding marketing companies in improving performance and pricing. In my opinion, programmatic advertising will continue to expand rapidly because it enables businesses to more precisely target the highest-value inventory in real time.

IAS offers an ad verification solution to companies

Customers can get the most return on investment by checking the legitimacy of their ads and making sure they reach their intended demographic in a trustworthy setting. To this end, IAS equips its customers with the resources (such as analytics) necessary to enhance media quality and the efficacy of their campaigns. Moreover, IAS prevents open web fraud and brand-unsafe inventory in real – time basis. What’s more, with IAS, clients can direct their programmatic budgets toward the highest-quality inventory, and either aim or forgo content based on their own preferences and preferences, as determined in real time by signals from DSPs.

The foundation of IAS’s value proposition is IAS Quality Impressions, a proprietary metric that ensures digital content quality standards for advertising effectiveness, according to IAS S-1. Quality Impressions refer to the number of times an online ad is shown to a real person rather than a bot, in the correct location on the screen, and in an environment that is fitting for the advertiser’s brand. IAS’ contextual capability also aids brands in avoiding and targeting content according to predetermined guidelines or campaign objectives.

In addition, the technology will be used to classify content based on how it makes people feel on a global scale. Because of IAS, publishers can earn more money from their ad space, which is a win-win situation all around.

Global customer base provides rich amount of data which drives insights

IAS has thousands of satisfied clients, the vast majority of which are in the advertising and, to a lesser extent, publishing industries. In my opinion, IAS’s ability to gain an edge over competitors is due in large part to the variety of clients the company has worked with in the past. As I’ve already mentioned, accurate underlying data is crucial in the realm of digital advertising, and this is where IAS shines. They gather trillions of data events every month, providing a full picture of all digital advertising transactions. Customers can use this data set in conjunction with IAS’s machine learning capabilities to gain actionable insights into the performance of their marketing in real – time basis.

Think of it as a flywheel effect: as the number of customers grows, so does the amount of data collected, allowing for more insightful analysis and, ultimately, better service. If I’m right and IAS keeps expanding, it will be able to keep its edge in the market.

A market leader

IAS provides important research studies and academic papers in addition to its participation in professional conferences and the hosting of proprietary events. In my opinion, these works showcase IAS’s leadership in the industry by disclosing novel inferences drawn from countless data events. Ad buyers and sellers can use IAS’s monthly global measurements as a benchmark for the efficacy of their advertising and inventory. IAS continually amplifies and shares these thought leadership initiatives through lead generation, content creation, and corporate communications, to help ensure that IAS solutions inspire confidence to customers.

Key relationships with stakeholders lend credence to IAS capabilities

IAS has grown steadily over the years to become a reliable partner for many of the reputable advertising platforms, enabling them to keep better tabs on and account for their ad spending. My impression is that this speaks highly of the quality and reputation of IAS in the industry. The majority of digital advertising budgets are controlled by companies like Google (GOOGL), Meta Platforms/Facebook (META), and Amazon (AMZN), all of which integrate IAS solutions to deliver the necessary verifications required by the customers IAS serves.

The credibility of IAS product capabilities is further strengthened by the company’s close collaboration with industry institutions and accreditation groups. IAS, for instance, has received viewability accreditation from the American Broadcasting Companies [ABC], as well as proprietary metric accreditation from the Media Ratings Council [MRC]. To keep its MRC certifications current, IAS also submits to annual audits by an external auditor to check that all of its products are in keeping with MRC requirements.

Targeting the top global advertisers and international markets

In my opinion, IAS can gain even more traction by forming partnerships with the world’s leading advertisers and focusing on high-spending niches and brands that have an innate sensitivity to issues of brand safety, appropriateness, and return on ad spend. The global marketing industry is expanding into new vertical markets and investing in more advanced verification strategies. In my opinion, there is growing interest in IAS’s solutions all over the world, but especially in Latin America and Asia Pacific, where the company makes only 37% of its total revenue.

I believe IAS can increase its market share by working more closely with the most popular social media platforms, refining their programmatic solutions, and, most importantly, capitalizing on the scalability of the competitive advantage it has built on the strength of its rich data set. I also think that IAS can grow its addressable market beyond core validation and viewability through the addition of new capabilities like ad targeting and new channels like CTV.

Forecast

According to my investment thesis, IAS can maintain a healthy growth rate in the near term, albeit with a growth slowdown in 2023 due to the recession, eventually reaching $555 million in revenue in FY24. This is because I believe the total addressable market (“TAM”) is massive and that IAS can continue to reinvest in its business (new verticals, new products, etc.) to increase growth. Because the company is currently losing money as a result of reinvestment, it should be valued using forward revenue.

To value IAS, I illustrated two different scenarios based on two valuation multiples (which trades at 3x forward revenue today).

1. I assumed IAS would trade at the same valuation today.
2. I assumed IAS would trade at the same level as its peer (DoubleVerify Holdings, Inc. (DV)) at 6x forward revenue – I believe this is possible given that both are of similar size and growing in a similar range.

Key risks

Product quality

Marketers use IAS to verify and rate the quality of media. As a result, it is critical that IAS provide precise reporting on marketing campaigns. Without this, I am concerned that customers will lose trust in IAS if they believe the ROI is low, which could lead to a major problem.

Data fidelity

There are risks involved in gathering, using, storing, and discarding sensitive data. Companies like IAS have accumulated vast amounts of user data that, if leaked, could be used maliciously. Because of this, protecting sensitive information is an absolute necessity.

Conclusion

Integral Ad Science Holding Corp. is, in my opinion, undervalued by at least 35%. Several factors, such as the rise of ad fraud, the importance of brand reputation management, and the meteoric rise of programmatic advertising, have me convinced that demand for Integral Ad Science Holding Corp. products will only increase in the years to come.