Advertisers Are Reportedly Returning to Elon Musk's X. This Little-Known Software Company Just Partnered With X and Could Be the Surprise Winner of This News.

Billionaire Elon Musk purchased Twitter in 2022 and rebranded the social media platform as X. In the wake of Musk's takeover, many advertisers left the platform and took their ad spending with them.

X is no longer a publicly-traded company so investors aren't privy to its financials. But the platform reportedly generated revenue of around $2.5 billion in 2023, suggesting its advertising revenue was nearly cut in half following the acquisition.

However, it seems that some advertisers are rethinking their stance when it comes to Musk's X. Since Donald Trump's electoral victory, news broke that brands that previously paused their advertising spend on X are now resuming it.

Obviously, this is good news for X, but investors still can't buy shares in the company. That said, they can buy shares of adtech company PubMatic (NASDAQ: PUBM), which could be a surprise winner from these developments.

Why is PubMatic a potential winner here?

There are two sides to advertising. On one, there are advertisers looking to get their ads in front of consumers. On the other, there are publishers looking to monetize their content by selling ad slots. So advertisers are buying space and publishers are selling it. X is looking to sell ad slots, and for that, it needs a technology partner.

That's where PubMatic comes in. The company offers a supply-side platform (SSP) where advertisers can bid for space, and X just turned to PubMatic to help maximize its ad revenue, according to Business Insider, .

Hundreds of millions of people use X, so this deal has a lot of potential for PubMatic, which is still a relatively small company. And if advertising demand is truly picking back up for X, it could further boost the partnership's benefits to PubMatic.

Is PubMatic a good investment opportunity?

PubMatic is a great investment opportunity that's been waiting for exactly this kind of catalyst. Despite being a small-cap stock, it's competitive in the advertising industry. It ended the third quarter of 2024 with 280 customers, which was up 13% year over year.

It's also important to note that half of the activity on PubMatic's platform is from supply path optimization deals. In short, there are dozens of companies that do what PubMatic does, and its customers work with multiple vendors. But with supply path optimization, PubMatic helps its customers consolidate their SSP providers. In other words, it's outcompeting many of its rivals.

Granted, being small does have its drawbacks. For example, a single company on the other side of the advertising business changed how it bids on ads back in May. PubMatic's second-quarter results consequently came in lighter than expected, forcing it to lower full-year guidance.

Looking at the business overall, PubMatic is in a good place as digital advertising continues to grow. Meanwhile, co-founder and CEO Rajeev Goel is determined to run the business profitably and with plenty of cash. To that end, the company has generated free cash flow of $26.0 million through the first three quarters of 2024, which is good for a margin of nearly 13%. And it has cash, cash equivalents, and marketable securities of $140.4 million with zero debt.

That's a lot of cash flow and cash for PubMatic considering its market valuation is below $800 million. In fact, management believes its stock is a bargain and has aggressively bought back stock in 2024, reducing its share count by nearly 7%. And it's reduced it by nearly 14% over the past year.

Data by YCharts.

The fact PubMatic stock is still trading almost 80% below its all-time presents an attractive entry point for investors today. If the partnership with X turns out to be as big of a deal as I believe it is, then PubMatic's financial results should start turning some heads sooner rather than later.

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Jon Quast has positions in PubMatic. The Motley Fool has positions in and recommends PubMatic. The Motley Fool has a disclosure policy.