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Rubicon Project - Strong Buy On Q1 Earnings Overreaction

Summary

Rubicon is down 30% after reporting solid Q1 earnings.

The market overreacted to the conservative guidance and management's cautious tone on the Q1 call.

The valuation seems very attractive for long-term investors.

Rubicon is a strong buy at current levels.

Rubicon Project (NYSE:RUBI) is down almost 30% since reporting strong Q1 earnings. I think that the market overreacted to the Q2 guidance and management's cautious tone on the conference call. The company is now trading at an EV/Sales ratio below 2, which represents a historical buying opportunity. The valuation has never been lower and growth expectations remain strong. The company is also known for providing very conservative guidance, especially for quarterly and annual EBITDA, which leaves room for positive surprises going forward.

A very strong Q1 report gets neglected due to the conservative Q2 guidance and management's cautious tone

Rubicon's Q1 revenue increased 71% Y/Y to $63.6 million, which was $4.2 million above the analyst consensus, while EPS was $0.31, significantly above the $0.03 consensus. Revenues declined sequentially due to seasonal factors - Q4 is always the strongest quarter for Rubicon. Adjusted EBITDA was $15.4 million, which was $10.4 million above the mid-point of the guidance, and the EBITDA margin was 24.3%, representing a significant increase from 11.3% in the same quarter of 2015.

One may wonder why the stock plunged almost 30% in just a few days and after such a strong report. I think that these are the two main reasons:

1. Q2 revenue guidance came below views. The company expects Q2 revenues between $61 million and $64 million, which was below the analyst consensus of $65 million. The consensus has since moved down to reflect the negative change.

2. Management's tone was very cautious on the Q1 call. They warned about ad spending shifts from month to month and from quarter to quarter, which may affect quarterly revenues going forward...


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