What happened
November was a narrative-changing month for advertising-technology company Magnite (MGNI +2.84%). According to data provided by S&P Global Market Intelligence, the stock was up 110.4% during the month and I believe it's because its third-quarter results resonated beyond the cold numbers. Magnite is a recently formed company. Q3 results suggest the new venture is paying off and this caused Wall Street to take notice.
So what
In April, The Rubicon Project and Telaria completed a merger to form the largest independent sell-side ad platform in the world and the company was renamed Magnite. The first quarterly report following the merger was lackluster and actually showed a revenue decline on a combined basis. Magnite stock remained in the doldrums as a result, with Wall Street clearly questioning its ability to capture the opportunity in programmatic advertising and specifically in connected TV (CTV).
Image source: Getty Images.
On Nov. 9, Magnite released results for Q3 (its second quarterly report as a combined company) that were much improved. It generated Q3 revenue of $61 million, which was up 12% year over year from the combined results of the two previously independent companies. More importantly, Q3 revenue was up 44% just from the previous quarter as live sports and political ads helped.
On a macro level, CTV is replacing traditional pay-TV at a rapid pace, and this trend is one reason to like Magnite's positioning in the space. Magnite's CTV revenue was up 51% year over year in Q3. Later in the month, management provided a press release showing just how much advertisers are currently switching to programmatic ads -- the kind that Magnite's technology platform enables -- fueling more optimism from investors.
Now what
Before November, Magnite traded like a value stock. In other words, its valuation looked cheap compared to other companies. For example, its price-to-sales ratio has been between two and four for much of 2020. For perspective, there are many stocks trading at 10 times that valuation, including some in the programmatic-advertising space. However, the cheap valuation was indicative of a company that had previously failed to live up to expectations. There was no reason for it to have a higher valuation unless it could demonstrate better results.
With Magnite stock more than doubling in November, it's clear the narrative is changing and more investors are buying into this long-term growth story. The company's results are improving, yes. But most of Magnite stock's gains are the result of receiving a more expensive valuation from the market (investing jargon for this is "multiple expansion"). Therefore, it will be up to the company to deliver in coming quarters on these increased expectations.
