‘Stories don’t equal fluff’: Why narrative spins, not fundamentals, are driving the ad tech stock market

With what comes after third-party cookies and mobile identifiers unclear, the ad tech market is in limbo. Yet money is pouring into publicly listed ad tech vendors.

PubMatic’s stock price has nearly doubled since it debuted on the Nasdaq on Dec. 9, and the ad tech vendor’s market capitalization is $2.2 billion. Understandably, management tried to temper expectations on the company’s first quarterly earnings call last week. That said, Pubmatic’s stock was up 22% on the day after those earnings were reported. No amount of bad news it seems — from imminent tracking restrictions to fraud in connected TV — can stem the flow of cash into these companies. 

How is this possible? One explanation is that stock markets don’t have much to do with the economy now. They’re just casinos driven by the momentum that’s accelerated by stories. Put another way: investors are buying into companies like Pubmatic in part because of the overwhelmingly positive narrative of online media’s unfettered growth during the pandemic. Even smaller ad tech vendors have been swept up in the slipstream. AcuityAds, a small Canadian-based ad tech vendor, saw revenues slip 3% year-on-year to $26.1 million in its most recent quarter but finished 2020 with its stock up nearly 1000%. Investors buying these stocks believe, no matter what happens, the market is robust enough to withstand the existential headwinds ahead. 

“The stocks that are doing well right now often are the ones that have the best storytellers — and investors are hungry for narratives, whether that’s for Tesla or ad tech,” said IAB Europe chief economist Daniel Knapp. “But stories don’t equal fluff. There is a lot of real opportunities for ad tech, from the much-quoted CTV to solving identity to retail media and a much stronger focus on execution than maybe a decade ago.” 

Additionally, there’s so much cheap capital sloshing around the financial system thanks to unprecedented stimulus from governments — and there are few better places to put cash where it can flip a decent return currently than ad tech. 

“When it comes to these ad tech companies you’re seeing that investors aren’t necessarily seeing them through a filter that focuses on the fundamentals of business i.e numbers,” said Dr. Jorge Barraza, a professor in the online Master of Science in Applied Psychology program at the University of Southern California. “The usefulness of narrative is that it can sustain attention in a particular place more so than warranted because humans aren’t designed to be responding to percentages and averages.”

Narrative economics, as explored in the work of Nobel Prize-winning economist Robert J. Shiller suggests that the stories investors tell themselves drive their rationale for spending. If there’s one thing ad tech isn’t short of, it’s exciting, whirlwind narratives blustering up around several issues that include the pivot to privacy, accelerating consolidation and the topic du jour connected TV. 

So far investors are lapping up the CTV narrative as a reason to invest in ad tech, and for good reason. Advertisers in the U.S. are forecasted to spend $11.4 billion on connected TV ads this year, up 40% on 2020, per eMarketer. This spending, goes the thinking, will continue to grow much faster than general media ad spending for years to come. Magnite’s recent earnings history is a microcosm of this. It managed to grow revenue in the second, third and fourth quarters in 2020, with 12%, 12% and 20% year-on-year improvements. However, CTV was where the real gains were made. In those same respective quarters, CTV revenue grew 12%, 51%, and 53%.

But for all the growth percentages and usage statistics floating around CTV, there’s limited revenue attached to those numbers. It’s rare to see an ad tech vendor report how much money they’re actually making on the fastest growing part of the market. Indeed, CTV has a fair few unresolved issues, namely transparency into how ads are bought. In other words, intrinsic value will start to matter to investors at some point and when it does ad tech vendors will have to justify lofty valuations with solutions to problems like transparency.

Spin has always been important to public ad tech companies — even as far back as 2013. Back then, though, the narratives were complicated, while the businesses weren’t complex enough. “You had ad tech vendors telling investors that they had rocket scientists as technologists creating fancy algorithms,” said Bob Regular, CEO of ad tech firm Infolinks. Now, however, the story isn’t as complicated and business is robust. “CEOs are able to tell narratives in ways that don’t cause investors to go all glassy-eyed,” said Regular. 

See The Trade Desk. The ad tech vendor’s narrative that it’s the alternative to Google crystallizes the business in the minds of investors. Equally, The Trade Desk is good at doing what it promises investors — delivering consistent growth. 

As positive as these narratives can be for ad tech, they’re also exceptionally volatile. Magnite’s stock plunged as much as 13% the day after a short-seller released a damning report on the company’s strategy — proof that investors are buying into these narratives, good or bad.