November was a narrative-changing month for advertising-technology company Magnite (MGNI -1.33%). 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.
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).
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.
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.