Ad tech company PubMatic (PUBM) is a small-cap name, but it can offer a big opportunity with the right covered call trade.
The company with a market capitalization of approximately $1.22 billion went public in 2020, and like other companies that began listing on the stock exchange at that time – whether through IPOs or a craze for special purpose acquisition companies – stocks initially soared, only to sell off significantly over subsequent quarters.
The company released strong quarterly results this week, and investors who had already abandoned PUBM might have thrown the baby out with the bathwater. Additionally, the options that are against this equity are both liquid and offer strong return potential, making the stock a strong covered call candidate.
PubMatic provides cloud services, which enable programmatic advertising transactions for web creators and advertisers around the world. Advertisers and digital publishers can meet and discuss pricing and features that benefit from the huge boom in programmatic advertising. Among the services provided by PubMatic are workflow automation, data integration, audience services and high-quality inventory through its global omnichannel infrastructure to advertisers.
The entire industry has faced a headwind amid concerns over declining marketing spend as economic growth has slowed significantly throughout 2022 from the strong pace of 2021. Indeed, several companies in this sector have recently lowered their forecasts to take into account the slowdown and the uncertainty surrounding it. PubMatic put most of those concerns to rest for a while when it released more than strong quarterly results on Monday.
The company easily beat consensus on revenue and net income with its second quarter results. Management also reaffirmed its guidance and increased its projections for adjusted earnings before interest, taxes, depreciation and amortization for fiscal year 2022. Management expects revenue growth of 23% for the whole of 2022. business is very profitable. PubMatic also has a rock-solid balance sheet, debt-free and north of $180 million in cash, which is about 15% of the stock’s market capitalization at current trading levels.
Six analyst firms, including Oppenheimer and RBC Capital, have reissued buy ratings on the stock since second-quarter results hit the wire. A couple had slight upward price target revisions. All of this sets up a solid covered call opportunity in PubMatic.
Here’s how to initiate a position in PUBM via a covered call strategy. We will opt for a call strike slightly below the stock’s current trading level for additional downside protection, given how markets have risen in recent weeks.
Using January’s $22.50 buy strikes, create a covered buy order with a net debit between $18.50 and $18.70 per share (net stock price – premium option). This strategy offers both downside protection and upside potential of just over 20%, even if the stock does nothing for the duration of the five-month option.
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