Roku (ROKU 2.05%) and Magnite (MGNI -0.65%) are both profiting from the evolution of the traditional TV market into digital platforms.
Roku's devices let users access myriad streaming media apps, and its sells ads and content partnerships across its digital platform. Magnite, which was recently formed by the merger of ad-tech companies Rubicon Project and Telaria, serves ads for connected TV, PC, and mobile platforms.
Roku's stock rose more than 30% this year as it dazzled investors with its growth in revenue and users. Magnite (which traded under the name Rubicon until June) impressed investors in August when it reported its first quarter as a combined company, but its stock remains down nearly 10% for the year. Let's see which stock is the better buy.
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The key differences between Roku and Magnite
Roku generated 69% of its revenue from its digital platform of ads and content partnerships last quarter. The remaining 31% of its revenue came from its streaming hardware devices. Roku's digital platform generates much higher-margin revenue than its hardware business, which faces stiff competition from rivals like Alphabet's Google Chromecast, Amazon's Fire TV, and Apple TV. As a result, its digital platform generated 94% of its gross profit last quarter.
After Rubicon merged with Telaria, Magnite became the world's largest independent sell-side ad tech company. It helps publishers craft data-driven programmatic ads for various platforms. Last quarter, Magnite generated 45% of its revenue from mobile platforms, 36% from desktop platforms, and the remaining 19% from connected TVs. Magnite believes the growth of the connected TV market will likely accelerate and surpass that of its other platforms.
Roku is shielded from the COVID-19 crisis
Roku's revenue increased 48% year-over-year in the first six months of 2020, as its platform revenue rose 58% and its player revenue grew 29%. The robust growth of its player business indicates it isn't ceding the streaming device market to Google, Apple, or Amazon.
Image source: Getty Images.
Roku's platform gross margin contracted due to slower ad sales during the pandemic, but its player gross margin expanded as it offered fewer promotions, which suggests it still has plenty of pricing power in a crowded market.
In the second quarter, Roku's active user accounts rose 41% year-over-year to 43 million, its streaming hours surged 65% to 14.6 billion, and its average revenue per user grew 18% to $24.92. Those figures all indicate its business is well-insulated from the COVID-19 crisis and benefiting from the secular growth of the streaming market.
That's why it wasn't surprising when CEO Anthony Wood declared the "ongoing COVID-19 pandemic is accelerating the macro trends that will define the streaming decade" during last quarter's conference call. Roku didn't provide any guidance for the full year, but analysts expect its revenue to grow 41%, and its bottom line to remain in the red.
Magnite is passing a cyclical trough
Magnite's revenue rose 12% year-over-year in the first half of 2020. Its mobile revenue grew 4%, while its desktop revenue declined by 4%. It didn't generate any connected TV revenue as Rubicon a year earlier.
But on a pro forma basis, which merges Rubicon and Telaria's results for both years, Magnite's connected TV revenue rose 12% year-over-year in the second quarter as its mobile and desktop revenues declined 32% and 26%, respectively. But its total pro forma revenue fell 24% -- indicating the recently merged companies are still struggling with sluggish ad spending throughout the COVID-19 crisis.
But during Magnite's last conference call in August, the company noted its third-quarter pro forma revenue growth had accelerated back toward "break-even" levels, and its connected TV revenue had risen about 50%. It noted that growing ad demand from the tech, home, and garden markets were offsetting the soft demand from the travel, retail, and auto markets.
In short, Magnite's business likely passed a cyclical trough in the first half of 2020. It didn't provide any guidance for the full year, but Wall Street expects its revenue to rise 27% and for its earnings to stay in the red.
The valuations and verdict
Roku and Magnite are both difficult to value due to their lack of profits. But in terms of revenue, Roku trades at nearly 14 times this year's sales, while Magnite only trades at four times this year's sales. Roku's market cap of nearly $22 billion also puts it in a higher weight class than Magnite's valuation of less than $800 million.
Roku is generating stronger revenue growth than Magnite, but Magnite's lower valuation, smaller market cap, and the accelerating growth of its connected TV business indicate its stock has more room to run.
