Media Sector Review July 2021

Ad Tech – Back in the Saddle and Riding High

Last quarter we noted that advertising technology (Ad Tech) stocks were the strongest performing sector over the previous 12-month period. The average stock in the Ad Tech sector at the end of the first quarter of 2021 was up 339% over the prior year.

Part of this reflected the starting point: at the end of March 2020, concerns about Covid-19 and its impact on advertising had caused the average stock in the sector to decline by 27%. The other part of the story is how well Ad Tech stocks recovered from the initial advertising downturn: while 2Q 2020 revenues declined, they rebounded strongly in 3Q and 4Q of 2020, and that strength has continued into the first half of 2021.

The strong recovery in operating results combined with the strong stock price recovery has led to a rebound in the Ad Tech IPO market. The first half of 2021 saw Pubmatic (PUBM), Viant (DSP), AppLovin (APP), DoubleVerify (DV) and Integral Ad Science (IAS) go public, while Outbrain and Teads filed to go public. Meanwhile, IronSource, Taboola and Innovid all agreed to go public via a reverse merger with a SPAC (Special Purpose Acquisition Company).

It hasn’t always been this way. In fact, the first group of Ad Tech companies to go public in the 2010-2016 time-frame did not perform well on average. As shown in the chart on the next page, these Ad Tech “1.0” companies saw an average decline of 4% one-year after their IPO. One reason some of these companies didn’t do well is that they missed expectations or guidance often within 2-3 quarters after going public. Another reason the group didn’t perform well is that 6 of the 9 Ad Tech 1.0 companies that went public were not profitable on an EBITDA basis, and many struggled to demonstrate a path to profitability.



It is interesting to note that the only three Ad Tech companies that remain public today from the 2010-2016 IPO group (The Trade Desk, Criteo, and Magnite, formerly The Rubicon Project) are the three companies that were EBITDA positive at the time they launched their IPO.

Two years ago, we noted that most Ad Tech companies were trading at 1.0x revenue or less, well below the 7.0x average IPO revenue multiple or 4.8x median IPO revenue multiple as shown above. As shown in the chart below, the Ad Tech “2.0” IPOs (those that went public earlier this year) have performed quite well, with the average stock price return up 51% since their offering date. More importantly, Ad Tech valuations are at their highest levels ever. The 2021 Ad Tech IPO group has seen companies go public at 12.6x trailing twelve-month revenue. With these types of valuations, we expect to see more Ad Tech companies file to go public in the second half of 2021.

What accounts for the disparity between the Ad Tech “1.0” returns vs. the “2.0” returns? First of all the 2021 vintage of Ad Tech IPOs reflects a more mature set of companies than the Ad Tech 1.0 companies, with average LTM revenue 4.0x greater and median LTM revenue 2x greater than their Ad Tech 1.0 counterparts. Secondly, the 2021 vintage of Ad Tech companies is profitable. The average EBITDA margin of this year’s IPO group is 19%, versus an average EBITDA margin of 2% for the Ad Tech 1.0 group.

Besides the sector having more mature companies, another factor is how market has evolved from a desktop display advertising market to a mobile or video-centric/connected TV market. With viewership of video content moving from linear TV to on- demand viewing, Ad Tech companies are well positioned to benefit from the migration to IP-delivered content and ads. In March 2021, there were 54.4 million non-pay TV households in the U.S., up from 37.3 million three years ago. eMarketer estimates that by 2024, the number of non-pay TV households will eclipse the number of pay TV households. This should result in a massive advertising opportunity for Ad Tech companies that are well positioned to take advantage of the continued shift to streaming video.

SPACs Get in the Game
The Ad Tech sector has also caught the attention of SPACs. The multiples that SPACs are paying are even higher than the ones that Ad Tech companies have received through traditional IPOs. Of the three announced Ad Tech deals with SPACs, the average LTM revenue multiple is 16.6x and the median revenue multiple is 13.4x. The higher multiple typically reflects the higher revenue growth opportunities for the acquired company. For example, ironSource posted 83% revenue growth in 2020 and is projecting 37% growth in 2021.

After a couple of rough years in the market, during which Ad Tech stocks were shunned by Wall Street and the public companies traded at 1.0x revenues on average, finally it is good to be an Ad Tech company again.

Esports: An Eye On The Next Level
The Noble Esports Index underperformed the general market in the latest quarter, down 13% versus an 8% gain for the general market. While this is certainly a disappointing performance, the Noble Esports Index is still up an impressive 45% for the last 12 months, outperforming the general market's 39% advance. We believe that the weak Q2 performance reflects a victim of the success in Q1 and previous quarters. Only 3 of 16 stocks in the sector were up in the second quarter, but 9 are up for the year. We would note that there continues to be M&A interest in the space with a large number of transactions: of the 21 gaming deals, there were 4 esports transactions in the latest quarter.

Esports gained attention during the Covid crisis as gaming increased during stay-at-home mandates during the pandemic and as starved networks sought Esports programming in lieu of cancelled traditional sporting events. In many cases the industry struggled given the lack of in-person tournament play. As the economy has now reopened, large in-person events are now being scheduled. We believe that this will gain interest among consumers and advertisers, raising the visibility of this industry. It is important to note that in- person play is still novel and developing. Esports Entertainment's Helix venues are just now getting back to normal, increasing capacity from as low as 25% during the pandemic. Furthermore, the industry is looking forward toward developing events at traditional movie cinemas. Why would cinemas consider esports tournament play? Large numbers of affluent consumers! While there are logistic issues regarding the technological aspect of this prospect, it is an example of the forward thinking for venue growth in the industry. We believe that expansion in platforms and infrastructure will be a key driver for growth in consumers and advertising support.

Notably, on May 25th, Esports Entertainment Group (GMBL) received the long-awaited approval from New Jersey Division of Gaming Enforcement of its gaming license. While the approval does not distinguish between sports and esports betting, the company entered its application with one of the largest states for gambling in order to become the preeminent platform for esports betting. The company's Vie gambling software platform will go through regulatory testing labs to determine if the software is compliant and meets regulatory standards. We believe that the company could be up and running as soon as August. We estimate that the impact from the New Jersey license on fiscal 2022 revenues will be somewhat small, possibly $1 million in fiscal 2022, but grow meaningfully from there. Importantly, we believe that the company will pursue additional license opportunities in other States.

Internet & Digital Media M&A Picks Up Considerably in 2Q 2021 vs. 2Q 2020
Not surprisingly, there was a dramatic increase in M&A activity in 2Q 2021 compared to 2Q 2020. Noble tracked 146 deals worth $30.0 billion in the Internet & Digital Media sector in 2Q 201 vs. 100 deals worth $12.9 billion in 2Q 2020. For the second quarter in a row, the most active sector was Digital Content, with 54 transactions, followed by Marketing Technology transactions (38), and Information transactions (17).

From a deal value perspective, Digital Content deals led with $17.8 billion in transaction value, followed by the MarTech with $3.7 billion in deal value, followed by Agency & Analytics with $2.6 in deal value. Within the digital media sector, there were several subsectors that were active. Noble tracked 10 digital content deals worth $9.7 billion during the quarter, the largest of which are shown below, including Appollo Global’s $5.5 billion acquisition of Verizon Media (and its heritage properties Yahoo! and AOL).

While the digital content sector had the largest transaction value for the quarter, the mobile gaming and game developer sector had the largest number of transactions (21) and accounted for $7.8 billion in M&A during the quarter. Notable transactions include two reverse mergers into SPACs, including Super Group via Sports Entertainment Acquisition Corp (SEAH) for $4.6 billion and Jam City reverse merging with DPCM Capital in a $1.3 billion transaction. Take-Two Interactive was acquisitive with the $1.4 billion acquisition of Playdemic and the $380 million acquisition of soccer game developer Nordeus.

Finally, the podcast sector remained active, with 7 transactions announced in the second quarter, with large media companies such as Spotify, Amazon, iHeart and Sony continuing to stake their claim in the sector.


The following is an excerpt from a recent note by Noble’s Media Equity Research Analyst Michael Kupinski

Consumer cyclical stocks typically do well in an early stage economic and advertising recovery. As such, it is no surprise that most Media stocks outperformed the general market in the latest quarter. While the general market, as measured by the S&P 500 Index, was up a solid 8%, the Radio stocks outperformed with hefty gains of 34%, while Television stocks underperformed, up 3%. Investors appear optimistic regarding the economy. In the first quarter, GDP grew at an annualized rate of 6.4%, which is above the target growth rate between 2% and 3%. Such a strong GDP growth rate would imply a pick-up in inflation and cause investor concern. Inflation is increasing but investors appear to have shrugged off the rise in inflation, which may be as much as 5.7% on an annualized basis in the second quarter.

The jump in inflation is expected to be a function of an economy in recovery from a steep recession. A recovering economy on steroids from stimulus, however, that is driving consumer demand, putting pressure on commodity prices. In addition, there appears to be supply restraints driven by labor shortages, in turn fueling higher wages. For now, many investors and analysts believe that inflation will moderate for the balance of the year. This theory assumes that the rebounding economy will moderate on tougher year earlier comparisons and the prospect of slower consumer demand, easing pressure on supply and labor shortages. The Fed has indicated that the rising prices are "transitory" and that it is willing to tolerate a higher level of inflation for some time. Such an environment is favorable for consumer cyclical stocks. However, we would look for some trouble with the Media stocks, if, and when, the Fed changes course on interest rates. Cyclical stocks tend not to perform as well during periods of rising interest rates. As such, there will be an intense investor focus on the pace of the economy and inflation in the second half of this year and early 2022 as investors chart the prospect of a Fed interest rate hike. For now, investors appear willing to look beyond the current higher inflationary trends and the outlook for the Media stocks appear favorable, but likely will be choppy.

The strongest performance in the last quarter was in the Radio sector, up 34% in the latest quarter, continuing a streak that now extends a full year. The Radio stocks are up 66% over the past 12 months. Radio was one of the worst performing sectors during in the midst of the pandemic as the industry struggled with high debt loads at a time when advertising significantly fell. Investors appear more optimistic now, especially as many companies are aggressively paring down debt. Of the best performing stocks in the Noble Radio Index, most had favorable announcements regarding debt prepayments, including IHeartMedia (up 40% in the latest quarter) and Cumulus Media (up 61% in the latest quarter). Both companies announced debt prepayments of $250 million and $175 million, respectively, in the latest quarter.

Television Broadcasting

The FCC’s Finger On The Scale
The Noble Television Index underperformed the general market in the latest quarter, up a modest 3% versus the general market, as measured by the S&P 500 Index, up 8%. We view the performance as a breather from the strong gains achieved over the past year, up a solid 69% versus the general market, as measured by the S&P 500 Index, up 39% in the comparable time frame. The early 2021 stock performance was fueled by the strong gains with ViacomCBS, which collapsed in March, falling over 50%, following an announced equity raise, Wall Street downgrades, and Archegos Capital Management liquidating its entire position. With the Noble Television Index market cap weighted, the ViacomCBS performance adversely affected the performance of the Index.

Investors seem deal hungry. One of the strongest performers in the sector in the last quarter was Gray Television. In the latest quarter, Gray Television made back-to-back M&A announcements to acquire Quincy Media (February 1st) and then Meredith's broadcast television stations (May 3rd). The company revised upward the price for the Meredith transaction on June 3rd. Combined, these proposed acquisitions total $3.08 billion in transaction value. Gray Television shares performed well in the quarter, outperforming the general market and many of its industry peers, up 27%.
While Gray plans to sell stations that it overlaps in order to avoid regulatory issues in closing the transactions, the company was recently dealt a warning from the FCC. The FCC proposed to fine Gray $518,000 for evading local TV limits. The FCC stated that its ownership of KTUU, an NBC affiliate, and KYES-TV in Anchorage, Alaska was in violation of local ownership rules. The FCC alleges that Gray owned KYES ran programming that previously appeared on the CBS station, KTVA, which was owned by Denali Media, effectively running the number 1 and 2 network affiliated stations in a market. Gray notified the FCC that it has subsequently moved the CBS programming from KYES to a low power translator station and will air that programming on KTUU's sub channel. The FCC issued a stern warning that future violations will be subject to divestiture or enforcement action. We believe that this "dust up" is a publicity nightmare for Gray while it is seeking approval for its recent acquisitions. Importantly, we do not believe that it will hinder regulatory approval for the acquisitions.

Given that the fine is the statutory maximum for a single violation that the FCC can impose, we believe that the move illustrates the regulatory scrutiny that the industry faces, even after the FCC relaxed some local media ownership rules. We are concerned that the FCC's unwillingness and lack of leadership to further lift local and national ownership restrictions and caps on the broadcast television industry may constrain its ability to compete with the likes of Big Tech companies, which largely are unchecked. The FCC's recent relaxation of media ownership rules, particularly the cross-ownership restrictions, appear to us to be too little and too late. In our view, the FCC is largely to blame for the decimation of the newspaper industry. So, far, the Broadcast Television industry has attractive avenues for growth, but the inability to gain national scale and compete locally against far larger companies could be problematic in the future.

For now, the fundamental environment for the broadcast television industry appears favorable, with advertising rebounding. In addition, we anticipate that investors will begin to focus on the biennial elections and the influx of political advertising. Typically, the broadcast stocks perform best the year prior to an election year, up an average of nearly 20%. This year, the stocks appear to be on track to exceed the average performance, a combination of a steep advertising recovery, compelling stock valuations, and heightened M&A activity. Notably, the M&A activity has also diversified many of the broadcasters. The recent acquisitions by E.W. Scripps positioned that company in the growing OTT market. Most recently, Entravision transformed its company in a series of Digital Media acquisitions that now account for 75% of its revenues. As ownership caps are reached, we believe that more companies will seek growthier opportunities outside of the traditional Television space.

Radio Broadcasting

Debt Reduction Heightens Interest
The Noble Radio Index had strong performance in the latest quarter, driven by "event" news. The Radio Index increased a strong 34% versus the general market, as measured by the S&P 500 Index, up 8%, in the latest quarter. The quarterly performance boosted the annual gains to an impressive 66% gain. A handful of stocks contributed to the latest quarter gains; IHeart shares increased 40%; Cumulus Media was up 61%; and Urban One was up 187%. Aside from Urban One, which is discussed later, the thread for the industry's outperformance was debt reduction. On June 22, IHeart announced that it made a prepayment of $250 million on its debt. Cumulus Media made a $175 million prepayment on June 25. A portion of the $175 million, ($140 million), came from the sale of its remaining towers and land in Bethesda, Maryland. Debt levels are relatively high for the industry. Average debt to cash flow is an uncomfortable 9.1 times for the industry. With the stocks trading on average 10.7 times EV to EBITDA on 2021 estimates, debt reduction should have a meaningful impact on improving equity values. In addition, we believe that heightened interest in Radio stocks were related to the likelihood of strong revenue and cash flow gains in the quarter.

The pandemic hit the Radio industry hard in the second quarter 2020. Stay at home mandates significantly reduced Radio advertising, especially in important drive times. Radio second quarter 2020 advertising dropped a whopping 55% on average. Given a rebounding economy, Radio advertising is expected to have a comeback in the second quarter 2021, estimated to be up an average of 45% year over year. EBITDA is estimated to be up an average of 357% in the second quarter, obviously from a very low base last year. The improving fundamentals should allow for solid debt reduction throughout the balance of the year.

In addition to the debt reduction theme, many companies are diversifying from its traditional Radio roots into other businesses. Urban One's exceptional quarterly stock performance was driven by a city council approval in May of the company's proposed $600 million casino project in Richmond, Virginia. The city council will need to vote on the terms of the agreement at a meeting to be held November 2 and voters will need to approve the November referendum.

As we look forward toward the second half, revenue comparisons will become more difficult given the improving revenue trends last year, especially given the lift from political advertising in Q3 and Q4 2020. As such, there will likely be a deceleration in the rate of revenue growth in the second half from the second quarter revenue growth rate. Since cyclical stocks tend to follow revenue trends, we would not rule out the prospect of some profit taking in Radio stocks on the good news of the second quarter. We expect that revenue trends will improve in 2022, especially given the influence of political advertising next year. In addition, we continue to expect that managements will focus on aggressive debt reduction, which should help equity values.