Perion Network Ltd (PERI, Financial) is a technology company that specializes in digital marketing solutions. It offers a range of products and services, including performance-based advertising, email marketing and search engine optimization. Its technology is what allows the company to generate north of $1.4 million per employee through multiple streams, while the typical agency models operate at a small fraction of that. And, while the stock is up nearly 80% in the last year, there are still plenty of gains left on the table in my view. I generally do not like following the hype of a company trading at all-time highs, but in this case, I'm making an exception; here's why.
ChatGPT vs. Google AI
OpenAI publicly released its latest conversation based artificial intelligence iteration in late November of 2022, and within the first five days, the service had amassed over one million users. It is the fastest technology to reach that level to date.
If artificial intelligence is the future, and I think it will be, then Perion Network could be one of the very best ancillary investments thanks to its partnership with Microsoft’s (MSFT, Financial) Bing platform. That relationship accounts for nearly 50% of the company’s revenue, and while it’s not the only big name in Perion’s client book, it could still be worth billions by itself.
ChatGPT poses no real threat to Alphabet's (GOOG, Financial)(GOOGL, Financial) Google Search; however, Microsoft is planning to invest as much as $10 billion into OpenAI and will be implementing the technology into its Bing search engine.
Perion is Bing’s strategic partner for search advertising with the majority of its earnings connected to the number of users on the site. Named CodeFuel, this partnership alone was worth $800 million and could be extended in 2024. Perion repackages ad spots on Bing for its customers, adding features and enhanced targeting. It was named Global Supply Partner of the Year in 2021.
On one hand, Microsoft could just buy Perion for a little over $1 billion or Perion could continue to grow along with Bing’s popularity. The partnership is set to expire in just two years, at which point Microsoft could cut the company out or limit its scope. Yet, buying it or continuing the relationship seems more prudent in my opinion.
The real question is, how much of a dent will ChatGPT have on Google’s search dominance? That is still to be determined. However, even if Microsoft is able to capture just 1% of Google’s visitors, it would double traffic, and that would be huge for Perion.
Bing vs Google: Currently Google search is 72x larger
While Google still has a massive lead in artificial intelligence, it’s hard to invest in a company already valued at $1.3 trillion. That’s nearly 6% of the gross domestic product here in the United States. Investors that want to beat the market simply cannot buy and hold that kind of stock in my experience. That’s why after initial skepticism on Perion, I have come to like its model.
SORT: The future of advertising
Perion’s SORT™ platform is the only cookieless targeting solution enabling advertisers to reach their audience in the exact moment they are most receptive to seeing an ad using machine learning to predict consumer behavior in real-time. SORT does this without cookies, which are becoming more and more limited by browsers and devices across the internet.
This along with Perion’s other technology deliverables, many focused on artificial intelligence, means it should be able to help Microsoft and others implement and influence the next big change in reaching markets, capturing attention and helping companies make sales.
Perion has excellent financials
In the last 12 months, Perion generated $78 million in net income on $588 million of total revenue. It has north of $400 million in cash on hand and virtually zero debt. Profit margins stand at 13% with return on equity north of 20%, and revenue is growing at more than 30% per quarter year-over-year.
In fact, the company expects sales to nearly double in the next three years, and I can find no reason to expect differently considering who it works with and how strong Perion’s offerings seem. With its stock trading at 17 times forward earnings and a market capitalization of $1.4 billion, the potential for long term investors is huge at this valuation.
If the company is successful in blowing past $1 billion in sales with its current margins, net income would be around $150 million. With its current valuation, that would put the market cap in the $2.5 billion range or higher. The one thing Jim Cramer says that I agree with is that "there is always a bull market somewhere."
Long-term, companies will continue to advertise, spending more money on marketing in three, five and even 10 years from now. More importantly, that shift is 100% to digital. Even if you see a print ad or television spot, those will also be created, managed and potentially displayed digitally. Perion is in the right position to capitalize on two important industry growth factors. With advances in technology come shifts in market leadership. Regardless of what happens in 2023, AI looks like it will be a big winner in the advertising space.
