Why Connected TV Stock Magnite Is a Buy After Q3 2020

As expected, advertising dollars hit the pause button early on in the COVID-19 pandemic but have come roaring back as the year has progressed. And it's clear that digital marketing is winning a share of the massive global ad spending pie at the fastest rate in years as advertising activity returns. This has been working in favor of Magnite (MGNI 2.94%) -- the product of a merger between Rubicon Project and Telaria over the summer of 2020 -- and the tailwind provided by digital ads is only expected to continue over the next decade.

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Q3 2020 by the numbers

When combining Rubicon Project and Telaria stand-alone revenue from a year ago, Magnite grew total sales by 12% year over year during the third quarter to $61.0 million -- including a 51% increase in connected TV (CTV) sales to $11.1 million. The company's adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) profitability metric returned to positive territory at $13.7 million, good for an adjusted EBITDA margin of 23%. That's not bad for a company prioritizing growth. Besides stellar CTV results, CEO Michael Barrett said marketing activity is rebounding across all formats.  

As for the outlook for the final quarter of 2020, revenue expectations of $72 million to $75 million represent an 18% sequential rise over Q3 during the busy holiday shopping season. And as 2020 draws to a close, Magnite is in tip-top shape with $104 million in cash and equivalents and no debt.  

CTV leading the charge in a new digital era

Television delivered via the internet gets a lot of attention at Magnite, not just because it has been helping maintain the company's growth momentum as of late, but because of the huge potential it still represents in the decade ahead. Many new streaming services have become available in the last 12 months and there are more on the way, and this sell-side ad platform for content creators and publishers will find plenty of new growth outlets for its platform. 

On the earnings call, Barrett cited an eMarketer report that there are over 63 million people -- over a third of the U.S. population -- that are now unreachable by traditional pay-TV. Moreover, CTV ad spend is growing at a rapid pace, anticipated at 35% this year alone over 2019 figures. Notable reorganizations of content creation divisions at Walt Disney (DIS 0.18%) and Comcast's (CMCSA -0.37%) NBCUniversal (both of which are Magnite customers) indicate more streaming TV and new methods of monetizing the web-delivered entertainment are still forthcoming. And on the distribution front, Magnite is helping monetize content across all major devices from smart TVs to streaming devices by Roku (ROKU 0.15%), Amazon, Apple, and Alphabet.  

Barrett also said upfront costs related to new campaigns are now largely paid for, so marketing on CTV is all set to continue its run higher into 2021 and beyond as media conglomerates adapt to the times. Thus, with Magnite stock trading for just 5.3 times expected full-year 2020 revenue and homing in on breakeven, this small media and marketing technologist company looks like a real value right now -- especially considering the huge 47 times trailing-12-month sales premium Magnite's large peer The Trade Desk (TTD 3.35%) is trading for. Granted, The Trade Desk grew at a far faster 32% pace in Q3 and is profitable on an unadjusted basis. But still, Magnite's long-term potential is there.

With a solid rebound during the third quarter after a forgettable first half of 2020, I plan on picking up more shares of Magnite within the next few weeks.