- Outbrain is the leader of the content recommendation market, with a 25% share.
- The company generated revenues of $260M in 2014 with an 80% annual CAGR.
- Outbrain is valued at a very appealing PS multiple that will attract a high demand for the IPO.
- Within a reasonable price range, this is an attractive IPO to participate in.
Continuing on my earlier coverage of technology IPO's like Etsy IPO and GoDaddy IPO, let's take a look at a potential Outbrain IPO. The content recommendation platform Outbrain is reported to have confidentially filed with the SEC, aiming to go public at the beginning of 2015. The Israeli start-up, currently located in New York, enables web publishers to recommend content and links from other websites, alongside advertisers and marketing content. Each month, 561 million people are reached by Outbrain through the large number of sites in its network, including CNN, Time, USA Today, and Washington Post, to name a few.
Outbrain usually places its recommendations at the bottom of a story on a website, under the titles “you might find this interesting,” “from the web,” or “you might also like,” and it usually offers a mix of marketing content, organic content, and third-party content. After offering over-promising headlines like “Top 10 most important things in investing,” the company faced some criticism for the quality of the recommendations they offered and was frequently accused of degrading journalism.
However, Outbrain offers usefully integrated ads for websites and additional advertising media for SMBs, which are apparently succeeding to get traction around the web and generate substantial revenues.
Outbrain’s Business Model
Like any other online advertising company, Outbrain offers a cost-per-click revenue model that is usually shared with the hosting website. The essential service by Outbrain is provided for free to leading publishing platforms that, in return, receive a portion of the revenues for every click made on their sites to Outbrain’s recommendations. Outbrain’s customers paying for sponsored content are either small or medium businesses looking for a more effective advertising channel or big corporations looking for an additional ad service provider on top of Google.
This business model has been remarkably successful for Outbrain, which was able to increase revenues rapidly and present an amazing 80% CAGR between 2011 and 2014. A recent deal with Time Inc. highlighted Outbrain’s success when the company agreed to a $100M revenue share deal over the course of the next three years. Assuming Outbrain will deliver only a relatively small portion of its revenues from publishing on Time Inc.’s websites, the income potential Outbrain will gain from this deal is amazing.
Content Recommendation Market
The content recommendation market is highly competitive with a large number of players that vary from content recommendation experts, such as Outbrain and Taboola, to larger tech companies trying to penetrate this market, such as Yahoo (YHOO) and AOL (AOL). As shown in the chart below, the two Israeli start-ups, Outbrain and Taboola, dominate together almost 50% of the market. Outbrain’s rival, Taboola, is also mentioned as an IPO candidate, and it's probably waiting to see how the Outbrain IPO will turn out before going down that path. The third largest player, nRelate by the InterActiveCorp (IACI), was shut down after it failed to attract top publishing sites and customers large enough to justify its struggle.
As the content recommendation market is relatively new, its significant growth is ahead of it, and its total market size is expected to grow from around $700M in 2014 to $3.4B in 2018. This incredible increase will make this advertising niche a market that larger online advertising companies will be interested to penetrate, either by offering their solution or acquiring one of the leaders. Google has been rumored to sense the opportunity in the content recommendation field after secretly beta-testing its content recommendation platform.
Funding and Valuation
Outbrain raised more than $150M in eight funding rounds from January 2007 to February 2015. As shown in Chart 2 below, Outbrain's valuation was built in every round until it reached $640M in the latest round that took place earlier this year. Early shareholders include leading Israeli venture capital funds such as Gemini, Carmel Ventures, and Rhodium, as well as U.S. VC funds such as Index Ventures and Lightspeed Venture Partners.
Outbrain IPO Price Estimation
The latest series G valuation of $640M, together with TTM revenues of $260M, reflects an incredible P/S ratio of 2.46 for Outbrain. Outbrain P/S ratio is lower than that of other online advertising companies such as Yahoo (NASDAQ:YHOO) with 9.9, Google (NASDAQ:GOOG) with 5.5, and Facebook (NASDAQ:FB) with 17.9. According to the Wall Street Journal and Bloomberg, Outbrain will go public at a $1B valuation that will adjust the P/S ratio from the 2.5 mentioned above to 3.8, which is still significantly lower than its peers. Investors in the series G funding round paid $9 per preferred share of Outbrain; the higher 3.8 P/S ratio expected in the IPO reflects a share price of $14 and a 56% return for the participants in that round. Outbrain can stretch the IPO range up to $20, which reflects a similar P/S ratio as Google currently has and increases the company’s valuation up to $1.4B in the IPO. The price range of $14 to $20 makes Outbrain a very attractive buy. However, the company’s amazing revenue CAGR, market leadership position, impressive customer list, and attractive valuation will probably attract high demand in the IPO, which could boost the opening price by 30% to 50% from the range mentioned above. A bigger change in opening price could shift this IPO to an overvaluation turf that investors should treat very carefully.
Content recommendation market leader Outbrain is expected to go public this year, in a valuation ranging from $1B to $1.4B. The company, which has already raised more than $150M in pre-IPO funding rounds, has an impressive 80% revenue CAGR and a customer list comprised of the biggest names in the publishing market, such as CNN, Time, Washington Post, etc. As this is a very attractive IPO in a steaming hot sector of tech ads, it might soar sharply before the opening day and present an over-valuated price. Investors should treat this IPO carefully and make sure they do not overpay for these shares.
Disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.