If you've spent any time researching media stocks recently, it's likely you've seen comments and analysis suggesting we're in the midst of "the death of television." That's not technically true. A more nuanced description of what's going on is that consumers are increasingly rejecting bloated cable packages and bills in favor of streaming substitutes such as over-the-top and connected TV (CTV) services.
But nuanced view or not, this trend is happening. After losing 5 million pay-TV customers in 2019, the biggest media companies are finally committing to the idea of a post-bundle world and getting serious with their streaming strategies. While many on Wall Street seem to be focused on the various over-the-top services owned by Disney (Disney+, Hulu, and ESPN+) at the moment, big media players like Comcast (Peacock) and ViacomCBS (CBS All Access) have also been rapidly growing their streaming services in 2020.
Savvy investors understand there's money to be made from this significant shift in consumer behavior. Many have been searching for investment opportunities among the mid-cap companies that are helping the major content providers deliver and monetize this relatively new format.
Not all CTV stocks are going to be winners, though. For instance, two mid-caps are often mentioned as likely beneficiaries of this trend: Magnite (MGNI -3.30%) and Limelight Networks (EGIO 0.28%). Only one of them, though, is a buy.
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Magnite is a name you need to know
If you're unfamiliar with Magnite, that's understandable. The sell-side ad-tech company has undergone a few changes, starting with the merger of equals -- programmatic advertiser The Rubicon Project and connected TV specialist Telaria -- that created it.
The result of that merger was a company that can provide digital publishers with an omnichannel advertising experience (desktop, mobile, and CTV) and can capitalize on the significant growth in streaming hours happening via CTV. Like most media companies, Magnite had a rough first half of 2020 as many brands decreased their ad spending, particularly in the desktop and mobile formats. However, its third-quarter earnings report quickly changed the narrative. Investors were elated as the company reported that total CTV revenue grew over 50% year over year, and eight of the top 10 demand-side platforms more than doubled their CTV spend on Magnite's platform.
Even better, hidden in the Q3 earnings report press release was the fact that the number of advertisers using Magnite's audience-targeting feature increased by 2.5 times. That feature is the "secret sauce" that keeps Magnite's customers coming back. Taken together, the various results show that Magnite is quickly becoming a major player in this growth market, and with a client list that includes Walt Disney and Discovery, this company has a long runway in front of it.
Limelight stock is cheap for a reason
Another streaming play investors are paying close attention to is Limelight Networks. At first glance, this makes sense: The content delivery network (CDN) provider's services are critical to ensuring that the ever-growing flood of data moving from video-streamers and other content providers to users reaches them with the speed they expect.
Limelight boasts an enviable customer list that includes Amazon. And it's in the same general industry as high-flying stocks like Fastly and Cloudflare, but trades at a considerable discount to both companies.
After listening to Limelight's third-quarter earnings conference call, I've concluded that the discount is warranted. Management decided to take on a $125 million convertible debt offering for "flexibility in accelerating our growth initiatives," but aside from brief passing commentary, offered no tangible plan for how it would deploy the cash. Even worse, the company missed its estimated earnings entirely because of this debt.
However, what I'm truly worried about is customer power in a market where switching costs are low. Amazon alone accounts for 30% of Limelight's revenue, and its top 20 customers account for 72%. It's clear these powerful customers have the upper hand in negotiations and can significantly impact business operations.
During the Q3 conference call, CEO Bob Lento and former CFO Sajid Malhorta discussed repricing risk, with Lento noting that the impact of one large customer renegotiating its contract was significant enough that it took Limelight two or three quarters to pull its margins back up to where they had been. It's clear the company's customers consider CDN a commoditized product, so I expect further erosion of its margins.
