In 2020, Rubicon Project and Telaria merged to form the largest independent platform for content publishers to sell space to advertisers. Since then, the stock of the newly formed company, Magnite (MGNI 2.86%), has seen a meteoric rise. The future for this business continues to look bright, and it's likely that the company will continue to impress -- but Magnite's stock performance might not follow suit.
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Greater than the sum of its parts
The ad-tech company works on the "supply side" of its business: It makes money by taking a cut of ad spots that it helps sell to ad buyers -- the marketers and ad agencies that are trying to reach target audiences with their products and services. For example, suppose that Magnite's client, a streaming video service, has ad space to sell. Magnite sells an ad slot to a marketer for $1 on the client's behalf. It gets to keep a portion of that sale -- the company reports keeping 13% on average, so let's say $0.13 -- as profit; the client gets the other $0.87 from the sale.
The company's recent merger has strengthened its positioning in the market. Pre-merger, Rubicon had a platform for clients to sell audio, desktop, and mobile advertisement slots, while Telaria specialized in connected TV, or CTV, ads. The merger makes the company a complete, one-stop shop for publishers to sell their digital ad spots, no matter what type they are.
However, the supply side has many players in the space, making it exceedingly difficult for one clear winner to emerge. CTV, the fastest-growing opportunity on the supply side, has its own issues as well.
Large publishers that either have their own platform, like YouTube, or have significant negotiating power, like Roku (ROKU 3.26%) and Hulu, dominate the space. Because of this, Magnite faces an uphill battle in creating a strong moat. The publishers have most of the power, with no obligation to use Magnite if they already do. If one of its current CTV clients decides to use another platform or create its own, Magnite's finances could take a serious hit. And with one unnamed customer providing a whopping 37% of Magnite's accounts receivable according to its SEC filings, the company looks particularly vulnerable on this front.
However, Magnite is making investments to widen its moat and hopefully establish itself as the industry leader. In an effort to consolidate the market, Magnite agreed to buy privately held SpotX in early 2021. This leading video advertising supply side platform, formerly a fierce rival for Telaria, promises to provide an even greater boost to Magnite's CTV business. SpotX was able to generate $116 million in revenue in 2020, of which $67 million came from its CTV platform. If Magnite and SpotX were one business in the fourth quarter of 2020, CTV revenue would have tripled to $42 million from a year prior. In the future, SpotX should be able to provide a ton of value to Magnite.
Strong fundamentals
Magnite has experienced decent top- and bottom-line growth as a combined company. Despite the pandemic, Magnite managed to grow revenue year over year in the second, third, and fourth quarters in 2020, with respective 12%, 12%, and 20% gains. While those do not seem like impressive increases for a growth company, Magnite's crown jewel, its CTV platform, experienced much stronger growth. In those same respective quarters, CTV revenue grew 12%, 51%, and 53%. And while the company is not currently GAAP profitable over any full fiscal or calendar year, it did see an adjusted EBITDA margin of 25% in Q3 2020, which expanded further to 36% in Q4. That translates into $13.7 million and $29.9 million in EBITDA in Q3 and Q4 respectively. With the addition of SpotX, as mentioned before, Magnite has positioned itself well to continue its growth trend.
Buy, sell, or hold?
Magnite's 2020 and early 2021 were great for investors, as the stock rose to over $60 per share from a low of $4.09 in March. This corresponds to a massive expansion of its price-to-sales ratio from under 2 to over 24 in the same time frame. Compare this to the price-to-sales ratio expansion from 13 to 57 for industry counterpart The Trade Desk (TTD 6.31%) -- roughly a fourfold increase, compared to a more than 11-fold increase for Magnite. Considering that The Trade Desk is faster-growing and profitable, is Magnite's far greater multiple expansion justified?.
The company may do well, and so might its stock. But investors should exercise caution. Investors should ensure that management executes its plans impressively enough to justify the stock's big gain. If any red (or even yellow) flags come up regarding the company's positioning versus competitors or its ability to continue growing rapidly, some profit-taking might make sense.
After the stock returned over 1000% for investors in less than 12 months, it is difficult to believe that an equally impressive run up will occur soon. Much of the future growth is already reflected in the stock price, making Magnite look more like a hold at the moment than a buy.
