After suffering a rout early last year, shares of Magnite (MGNI 2.61%) spent the rest of the year riding high, gaining more than 275% to close out 2020. But the programmatic advertiser's stock came crashing down today in the wake of a short report issued by Spruce Point Capital Management.
The short-seller suggests Magnite shares could crash as much as 50%, citing a high valuation, growth headwinds, and merger related challenges. It the wake of the report, Magnite shares tumbled as much as 15% before rebounding.
Spruce Point lays out a laundry list of allegations, accusing Magnite of "masking" pre-merger challenges, but the short-sellers biggest beef seems to be with the stock's current valuation. Spruce points to the "400% share price appreciation" since the onset of the pandemic, pointing out that it's 20% above analysts' consensus estimates and calling it "completely unjustified." It's important to note that analysts frequently underestimate the share price of a high-growth stock in its early stages, so this call on valuation isn't particularly concerning.
The report also states that Magnite faces growth headwinds, as customers consolidate, the quality of connected-TV advertising inventory declines, and the one-time spike in political ads from the recent election cycle fades. These observations could be applied to the entire programmatic advertising industry, not just Magnite.
Spruce also casts aspersions on Magnite's leadership, calling them "highly questionable" and "unimpressive." The report also points to an unsuccessful lawsuit filed against the CFO's previous employer as evidence of his "suspect track record."
Finally, Spruce accuses analysts of "wildly" inflating Magnite's expectations, citing flaws in their models.
Many of these assertions are tenuous and/or reflect a mere difference in opinion with respect to the stock's current valuation. It's important to keep in mind that Spruce Point Capital Management has a vested financial interest in causing Magnite's share price to fall. It's entirely possible the stock may have run too far, too fast and could fall in the near term. However, for investors with an appropriate timeframe, these allegations do not appear to undermine the long term investment thesis.