Advertising technology company PubMatic (PUBM) is a small-cap name, but it may offer a big opportunity with the right covered call trade.
The roughly $1.22 billion market-cap company went public in 2020, and like other businesses that began trading publicly at that time -- either through IPOs or special purpose acquisition company craze -- the shares initially shot up, only to subsequently sell off significantly over the following quarters.
The company posted robust quarterly earnings this week, and investors who had already dumped PUBM might have thrown the baby out with the bathwater. In addition, the options that are against this equity are both liquid and offer solid return possibilities making the stock a solid covered call candidate.
PubMatic provides a cloud services, which enable programmatic advertising transactions for web creators and advertisers globally. Advertisers and digital publishers can meet and discuss pricing and features that benefit from the huge rise of programmatic advertising. Among the services PubMatic provides are workflow automation, data integration, audience services, and high-quality inventory via its global omnichannel infrastructure to advertisers.
The whole industry has faced a headwind from worries about declining spending on marketing, as economic growth has slowed substantially throughout 2022 from 2021's robust pace. Indeed, several firms in this sector have recently lowered guidance to account for the slowdown and uncertainty around it. PubMatic put most of these concerns to rest for a while when it delivered more than solid quarterly results on Monday.
The company easily beat both the top- and bottom-line consensus with its second-quarter results. Leadership also reaffirmed guidance and bumped up its projections of adjusted earnings before interest, taxes, depreciation, and amortization for fiscal 2022. Management expects 23% revenue growth for all of 2022. The company is nicely profitable. PubMatic also has a rock-solid balance sheet with no debt and north of $180 million worth of cash, which represents approximately 15% of the stock's market cap at current trading levels.
Six analyst firms including Oppenheimer and RBC Capital have reissued Buy ratings on the stock since second quarter results crossed the wire. A couple had slight upward price target revisions. All this sets up for a solid covered call opportunity in PubMatic.
Here is how to initiate a position in PUBM via a covered-call strategy. We are going to go with a call strike slightly below the current trading level of the stock for some additional downside protection, given the run up in the markets in recent weeks.
Using the January $22.50 call strikes, fashion a covered call order with a net debit in the $18.50 to $18.70 a share range (net stock price - option premium). This strategy provides both downside protection and potential upside just over 20% even if the stock does nothing over the five-month option duration.