Issue #24: Taking over China's used car market and an undervalued adtech specialist growing rapidly 🚗
Let's get into this week’s report. Here’s what we found:
- A consistently profitable adtech specialist that’s positioned for both strong growth and an epic short squeeze.
- An online used car dealer bringing a new level of service to the world’s largest vehicle market.
$35.70 - Share price at the time of writing
- PubMatic is a provider of programmatic advertising services. They use sophisticated algorithms to make online ad purchasing more efficient.
- PubMatic went public through an IPO in Dec. 2020. Shares rose from $20 to $29.45 in the first trading day. They peaked at $74 in Feb. 2021.
- Revenue and earnings growth have been consistently strong. Debt is minimal and customer retention is high.
- PubMatic is emerging as a short squeeze target for Reddit-based retail traders. The float is very small and the stock can rise quickly on any buying action.
What they do:
PubMatic facilitates the buying and selling of online advertising.
The company provides advertising solutions for publishers, online ad buyers, app developers, and video publishers.
PubMatic is primarily a sell-side provider. Publishers use the platform to optimize the ad inventory on their websites.
PubMatic processes tens of billions of impressions and nearly a trillion advertiser bids daily. That data gives advertisers and publishers real-time feedback on which ads are working. That allows platform users to constantly refine their ad strategy for optimal results.
The cloud-based platform boosts ad quality and monetization rates. This generates higher revenue for both publishers and advertisers.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of $PUBM from June 9 to 16 jumped over 417% from the previous week.
The surge in mentions of $PUBM was likely driven by two factors.
The stock has received consistent coverage from Seeking Alpha, offering favorable comparisons to competitors Magnite and The Trade Desk. The Motley Fool also featured PUBM as a growing company with short squeeze potential.
The significant short interest has drawn the attention of the Reddit community. At this writing short interest stands at 41.63%, making it one of the most-shorted stocks on the market. Reddit-based retail investors see the stock as a short squeeze candidate.
PUBM has an extremely small float of 8.30 million shares. This makes the stock an ideal short squeeze candidate. Even a limited amount of buying action could lock up much of the float and force the stock price up.
Notable comments from Reddit:
"Just bought into pubm. Earnings was great and seem to be following in trade desk footsteps Short squeeze candidate too. 44.63% of float"
"grabbed 100 shares of pubmatic, these prices are an absolute steal, profitable company with Wall Street giving it 100% upside on average? ill take it”
Signal: PubMatic holds a “Strong Buy” consensus view from 7 analysts, with 6 “Buy” ratings and one “Hold”. The average price target is $52.40. - nasdaq.com
Why PUBM could be valuable:
The programmatic advertising market is expanding rapidly. Analysts expect a 30.7% compound annual growth rate through 2027.
Google's impending phaseout of 3rd party cookie support is a serious concern for the programmatic advertising industry. PubMatic is part of a group developing a new standard identifier system that does not require cookies.
PubMatic has strong fundamentals.
- Q1 2021 revenues were up 54% over Q1 2020. Projected revenue growth for 2021 is 33%
- Earnings grew by over 1200% in the last year. Q1 2021 earnings were $.09/ share, over 2x the consensus analyst estimate of $.04.
- Net dollar-based retention, a key measure of customer satisfaction, is an exceptional 130%.
- The balance sheet is strong, with $110 million in cash and only $1.58 million in debt.
- The 72% gross margin and 17% ROE are strong indicators of effective management.
PubMatic currently trades at 10x 2021 sales, an attractive valuation relative to competitors.
PubMatic combines two compelling investment theses.
First, it’s being set up as the next Reddit-driven short squeeze. We’ve all seen how retail traders intent on squeezing a short-selling hedge fund can drive up a stock’s price.
Because of the very small float, PUBM’s price could soar on a small fraction of the buying action that moved GME and AMC. PubMatic doesn’t have to be a full-fledged meme stock to see a price surge driven by a short squeeze.
Second, unlike most meme stocks, PubMatic is not just a squeeze play. It’s a compelling long-hold investment based on fundamentals.
If a short squeeze emerges, there’s potential for exponential short-term gains. If a short squeeze fails to emerge, you’re buying a $35 stock with an analyst consensus price target over $50.
There’s obviously money to be made in predicting the next short squeeze. Buying a fundamentally weak stock purely because of an expected squeeze is still risky. If the squeeze doesn’t happen, you’re left with a weak stock. PUBM offers short squeeze potential with far less downside risk than most short squeeze candidates.
What the risks are:
The programmatic advertising market is growing fast, but a large part of it is within the “walled gardens” of Google, Facebook, and Amazon. PubMatic and its competitors have to fight for the “free internet” market outside the walled gardens.
PubMatic does not face a dominant competitor in the free internet market, but it is possible that competition will force the Company to drop prices, which could adversely affect margins and earnings.
The programmatic advertising market could be adversely affected by privacy regulations that restrict the use of customer data.
While PubMatic has an excellent operating record, it is a relatively new company with a limited operating history. It is not certain that the company will continue its current growth trend.
Bottom line: PubMatic is a fundamentally solid, rapidly growing player in an expanding industry. It combines high potential for a short squeeze with a compelling long-term investment proposition.
Uxin, Ltd. ($UXIN)
$3.67 - Share price at the time of writing
- Uxin is a leading online used car dealer in China.
- Uxin held an IPO in 2018, with shares priced at $9 each. The share price fell gradually to under $1 before recovering to the $4-5 range in June 2021.
- China’s government has initiated an aggressive campaign to boost used vehicle sales, providing numerous incentives.
- Uxin has moved from a sales platform model to selling cars exclusively from its own inventory, covering the entire used-car value chain and boosting margins.
What they do:
Uxin operates a used car trading platform in China.
Uxin’s services cover the entire used car value chain: selection of used cars, evaluation of car condition, reconditioning, financing, title transfer, transport, after-sale service, and other value-added products and services.
China’s used car market has traditionally been fragmented and limited by low trust in sellers, lack of transparency, and complex processes.
Uxin’s comprehensive services allow buyers to purchase with confidence and ease even if the vehicle is in another region. The entire process is online.
Uxin started as an e-commerce platform linking buyers and sellers. The company has moved to selling cars exclusively from its own owned inventory. The move reduced sales volume but delivers a much higher-margin business model with plenty of room for expansion.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of $UXIN from April to June spiked over 388% from the previous three months.
$UXIN is getting attention because of a sequence of news releases and subsequent stock moves.
On April 1 Uxin signed a deal with two Asian investors (NIO Capital and Joy Capital) who agreed to inject up to $315 million into Uxin. That deal spiked a surge of Reddit comments, and the stock went from $1.17 on March 31 to $1.97 on April 1, a 68% gain.
On April 22 Uxin announced a partnership with Chinese automotive specialist JD Auto, a Fortune 500 company with a $122 billion market cap. The deal expands Uxin’s capacity for car inspection, purchasing, insurance, and after sales service. It was seen as validation of Uxin’s standing in the Chinese market.
On April 28 Uxin issued a quarterly earnings release reporting the completion of its transition to an owned-inventory model. Sales were down from the previous year but gross margins improved dramatically and were positive for the first time.
From April 21 to June 14 Uxin stock soared almost 325%, generating further attention.
Notable comments from Reddit:
"I’m also long on UXIN. Potential to be the carvana of China."
" They have 100% successfully changed over to the same business model of Carvana. Just like Carvana, Uxin is an all-in house provider when it comes to used vehicles. Uxin is a better position to eventually outperform and outpace Carvana considering how new China’s used car market is. Uxin will reach profitability first before Carvana with the recent announcement of the JD. Com Partnership.”
Signal: Tiger Global, a $79 billion US investment fund, holds $69.7 million in Uxin stock. - cheaperthanguru.com
Why $UXIN could be valuable:
China is the world’s largest vehicle market, with a sales volume of 20 million units in 2020.
China’s used car market is in its infancy. Used car sales in China typically account for less than 30% of total vehicle sales. In the US used car sales are almost 70% of the total.
Used car sales in China have traditionally been depressed by a fragmented selling system, complex transactions, and low levels of trust in the quality and condition of the vehicles. Uxin is well placed to address these issues.
China’s government intends to double the used car market by 2025. Taxes on used car sales have been slashed to 0.5%, as opposed to 17% for new vehicles, and regulations on title transfer and cross-regional sales have been eased.
Uxin has been described as China’s largest used-car dealer. While volume has been reduced by the transition to an owned-inventory model, Uxin remains a well-recognized brand and is ideally positioned to capitalize on market growth.
What the risks are:
Uxin has never made a profit. The transition to a new business model is expected to improve margins and bring the company to profitability, but performance may not live up to expectations.
The US-China relationship is complex and the US government could place restrictions on the trading of Chinese stocks.
As China’s used-car market grows Uxin may face additional competition.
Uxin’s new business plan requires the integration of numerous value-chain components, many of which are new to the company. If the company fails to integrate these services and make them profitable, results could be affected.
Bottom line: Uxin is a prominent player in a market poised for significant expansion. High growth potential and the transition to a higher-margin business model puts Uxin in a strong position for long-term appreciation.
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