Better Investing Opportunity: Magnite or Roku?

2020 was a breakout year for two up-and-coming players in the digital advertising market. Magnite (MGNI 1.73%) is the world's largest independent sell-side advertising platform, with a keen focus on connected TVs. Roku (ROKU 5.41%) is the country's top streaming platform, connecting viewers with the streaming services they love. Both generate the bulk of their revenue from digital advertising. Which one is a better investing opportunity?

On this clip from Motley Fool Live recorded on Dec. 16, 2020, "The Wrap" host Jason Hall and Fool.com contributor Danny Vena discussed the changing ad tech landscape and why some players are better positioned than others.

Danny Vena: Well, let me start by saying that I do own both stocks, and I have owned both stocks for quite some time. So this is not anything new, and I would say that as these are smaller businesses in the grand scheme of things, I think both can do remarkably well from here, but this is going to be one of those cases where I'm going to take something of a better buy approach.

I'll start by saying, I think you should own both businesses. Having said that, let's look a little deeper into what they do, and who they are, and whether one of the two of them is a better investing opportunity. Now, I'll say that I have an answer going in, but I want to show folks some of the metrics and some of the other things related to the companies so that they can have an idea of where I'm coming from.

The first thing I'm going to do is I'm going to share my screen here because I think this is pretty interesting. If you look at this chart, the price chart year-to-date for both of these stocks, one is up 140%, that's Magnite, and Roku is up 144%. If you look at the two of them, both of them up around 140%, you might think, "Hey, look at that," but let's look a little bit further now.

The first thing I want to do is I want to look at what their trailing 12-month revenue has done. You can see that over the last 12 months, Roku has generated $1.5 billion in revenue, whereas Magnite has generated $188 million in revenue. We're talking stocks that are in two completely different playing fields here. Just to further emphasize that, if you look at the market cap, Magnite has a market cap that's just over $2 billion, where Roku has a market cap of $43 billion. Again, this is two totally different sized companies here.

Now that said, I want to look at the changes over the last 12 months, and you all see that Roku has actually increased its revenue. I'm sorry, that's year-to-date. Let's go to trailing-12-months. Roku has increased its revenue by about 36%, where Magnite has increased its revenue by 20%.

Now, it's important to note that both of these companies -- it may not seem that way -- you think of Roku, you think of streaming devices, and you think of Magnite, Magnite operates as a digital advertiser, but they actually overlap quite a bit in the space where they operate.

Roku makes the majority of its money from digital advertising. It has a platform for streaming, and users can go and choose apps from thousands of different streaming channels. You can get your regular ad-supported channels like[Disney's] Hulu, or you can get subscription channels like Netflix and Amazon Prime. They are all on there. Now, right now, the big holdout is [AT&T's] HBO Max, but we're expecting to hear about a deal between HBO Max and Roku any day now. (Authors note: This deal already happened.)

The majority of their revenue comes on what they call their platform segment. What the platform segment does is it handles the advertising, The Roku channel, and also the Roku operating system. Now, Roku developed its own operating system for connected TVs and it built from the ground up, which was very different than what a lot of competitors had done with their streaming devices. What they had done was they took a mobile app and repurposed it. By Roku rebuilding it from the ground up, this allowed them to have a much better product, and they have been licensing this to a growing number of connected TV manufacturers.

The reason that that's important is because right now, if you go back over the past year, the Roku operating system was found in one out of every three television sold in the United States and one out of four of every television sold in Canada. So they have a massive operating base.

Let's talk for a minute about what Magnite does. Magnite is actually the leading company, they are largest independent sell-side, programmatic advertising platform. Now that's a mouthful. Programmatic advertising uses high-speed computers and sophisticated algorithms to match available ad slots. Say, for instance, on ABC news, they might have a slot for advertising on the seven o'clock news, and what they do is they help match the existing ad inventory with those slots.

Now, people think a lot about The Trade Desk (TTD 4.15%). The Trade Desk actually operates on the other side of the coin. The Trade Desk operates on the buy-side, whereas Magnite operates on the sell-side. The sell-side is much more fragmented. The fact that Magnite is much smaller, I think it has plenty of opportunity to grow, but what I don't think is I don't think we're ever going to see Magnite grow as big as Roku is.

A couple of more quick metrics, and then we'll call it here. If you look at what the price-to-sales ratio is for Roku, 27 times current sales. Magnite is only about 8 times current sales. Magnite is much more of a bargain stock, Roku is more of a high-risk, high-reward opportunity.

After looking at those things, I would say that between the two, I believe that Roku has much further to go. I think it has a much larger market opportunity because essentially, Roku's total addressable market is going to be any television channel, whether it has advertising or not. So that's a huge addressable market. Whereas, with Magnite, Magnite is limited to one side of the equation and in a much more fragmented market, so they don't have as big a market opportunity as Roku is. Having said all that, between Roku and between Magnite, I would chose Roku.

Jason Hall: I'm torn and I have a little bias here because I don't own Roku and I do own Magnite. I think you could go right either way. To your point that you made earlier, I think they are both worth owning, even though I still haven't bit the bullet and bought Roku. But you make a really compelling case.