The launch of OpenAI’s ChatGPT just a few weeks ago could signal the next frontier in technology.
The conversational chatbot has the potential to disrupt massive industries like internet search and could supplement or even displace work like writing, legal contracts, and coding.
OpenAI’s chief benefactor is Microsoft (MSFT -0.20%). The tech giant has already invested $3 billion in the start-up and is in talks to put in another $10 billion. Microsoft also hasn’t wasted any time in using ChatGPT to its advantage, as it plans to launch a version of its Bing search engine with ChatGPT as soon as March.
If you’re an investor who’s bullish on ChatGPT, you may be thinking of buying shares of Microsoft, but the company is so big it would take a significant amount of growth, and likely years, for the AI technology to move the needle on Microsoft’s bottom line.
If you want to get upside exposure to the Microsoft-ChatGPT partnership, there’s a better way to do it. That’s buying shares of a small-cap ad-tech company called Perion Network (PERI 2.03%).
The Perion connection
Based in Israel, Perion is a fast-growing ad-tech company, valued at $1.3 billion. It’s best known for its Intelligent Hub, which efficiently connects ad buyers and sellers to optimize ad placements. However, the company also has a relationship with Microsoft’s Bing.
Perion has had a strategic partnership with Microsoft for over a decade in which it essentially repackages ad spots on Bing for its customers, adding premium features and enhanced targeting. In Nov. 2020, the two companies renewed their partnership for four years. They expanded from six countries to 34, added new collaborative features, and gave Perion better terms. At the time, Perion projected the partnership would drive an incremental $800 million in revenue over four years.
Last year, Microsoft named CodeFuel, Perion’s search advertising business unit, its 2021 “Global Supply Partner of the Year,” showing the strength of their relationship. That relationship is likely to continue even after the four-year extension lapses next year.
Through the first three quarters of 2022, Perion brought in $193.7 million in search advertising, up 25% from the year earlier, for 45% of its total revenue. The vast majority of that search revenue comes from Bing.
How Perion can benefit
With nearly 45% of its revenue coming from Bing, it’s clear that it wouldn’t take much for Perion to gain from the Microsoft-ChatGPT partnership.
Bing has roughly 3% market share in global search, but if ChatGPT significantly improves its results, the search engine could start to take market share from Google. If it does, even small gains could impact Perion. For instance, if Bing’s market share rose from 3% to 4%, that would show a 33% increase in Bing’s usage, and presumably, a similar increase in Perion’s search revenue.
Perion hasn’t commented on the potential impact of ChatGPT’s inclusion in Bing, and it would be premature for it to do so. Microsoft hasn’t even officially confirmed the news, which was originally reported by The Information, and we may not learn more until the new version of Bing launches.
Outside of the Bing relationship, Perion still looks like an appealing stock to own. Based on management’s preliminary results, the company finished 2022 with 33% revenue growth to $636 million, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 88% to $131 million. Based on that figure, the stock is trading at just 10 times EBITDA, and it’s valued at a price-to-earnings ratio of 17.5 using earnings reported under generally accepted accounting principles (GAAP).
The company is also growing rapidly in a challenging digital advertising environment. That shows its investments in connected TV and premium ad features are paying off, in addition to its partnership with Bing.
Perion’s stock has been a big winner over the last three years with the share price more than tripling. But if the ChatGPT-infused version of Bing gains traction, the stock could really take off.