Shares of programmatic advertising platform PubMatic (PUBM 3.70%) have been pummeled over the past few years. The stock surged in the early days of the pandemic, but it's lost more than 80% of its value since peaking in 2021.

On the surface, PubMatic's first-quarter report wasn't anything to write home about. Revenue sank 4% year over year, the company reported a GAAP net loss, and the outlook for the second quarter wasn't particularly impressive. But there's a lot to like about the company, and the stock looks like a solid bargain.

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Growth is better than it looks

PubMatic's revenue growth was affected by two things in the first quarter. A demand-side platform buyer changed its auction methodology in 2024, reducing revenue from that buyer. That change won't be lapped until mid-2025. The decline in political advertising from an election year in 2024 knocked down revenue as well. The 70% of PubMatic's revenue that wasn't touched by those two factors jumped by 21% year over year in the first quarter. That compares to 16% growth in the fourth quarter of 2024.

The number of ad impressions processed by PubMatic's platforms continues to grow at a healthy rate. In the 12-month period ending with Q1 2025, PubMatic processed 280 trillion ad impressions, up 27% year over year. Certain areas are also performing well for the company. Omnichannel video revenue rose by 20% in Q1, connected TV revenue soared by 50%, and revenue from emerging categories more than doubled.

While PubMatic's overall revenue may not grow much in 2025, revenue excluding those two temporary headwinds is expected to grow by at least 15%, with overall revenue growth accelerating in the second half of the year. Helping the cause is the company's new AI-powered media buying platform, which was launched last week. The new platform helps make the ad buying process simpler and more efficient, and it has shown good results for buyers in beta testing.

Keeping costs in check

PubMatic owns and operates its own infrastructure. Instead of paying a third-party cloud computing provider based on usage, the company can tune capital spending to match expected demand and unlock efficiencies that drive down per-impression costs. Over the past two years, PubMatic's cost of revenue has risen just 16% despite a 60% jump in ad impressions. Over the past 12 months, the company's cost of revenue per million impressions has dropped by 20%.

PubMatic plans to spend around $15 million on capital expenditures in 2025, a 15% reduction compared to its previous outlook. Pulling back on capital spending frees up cash for other users, including an additional $100 million for share buybacks, and it can help push up infrastructure utilization rates and drive down per-impression costs further.

While PubMatic posted a GAAP net loss for Q1, free cash flow remained positive. Over the five-year period ending in the first quarter of 2025, the company has averaged about $37 million in free cash flow annually.

An attractive valuation

While PubMatic's profitability metrics are under pressure right now, the stock looks like a solid buy based on the average annual free cash flow generation over the past five years. With a market capitalization of around $580 million, the stock trades for roughly 16 times that free cash flow figure.

Given PubMatic's long-term growth prospects and its underlying revenue growth right now, that valuation looks reasonable. If you factor in a cash-rich and debt-free balance sheet, the situation looks even better. The company ended Q1 with $144.1 million in cash and securities, giving it plenty of ammunition for share buybacks and flexibility to make growth investments or ramp up capital spending as needed to meet demand.

While an economic slowdown could hit the advertising industry and hurt PubMatic's revenue this year, the company's results are better than they appear, and the stock looks like a great buy.