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Why Magnite Stock Fell Sharply Today

By Jon Quast - Feb 25, 2021 at 4:06PM

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It seems shareholders are taking some profits off the table after an incredible year, but there are still reasons to be optimistic about the company's future.

What happened

Shares of Magnite (MGNI -0.94%) fell sharply on Thursday after the advertising-technology company reported its fourth-quarter and full-year results. It exceeded expectations, and its guidance is ahead of Wall Street's consensus forecasts. However, it seems investors were taking some gains off the table after the stock's incredible one-year run. At the close of trading, Magnite stock was down by 15%.

So what

Magnite's results are tricky to decipher because they include comparisons to when it was two separate companies: Telaria and The Rubicon Project. Fourth-quarter revenue only grew 20% year over year when combining what its predecessor companies did separately. For context, the company had previously pre-announced its $221 million in full-year revenue, so there weren't any surprises Thursday. However, when that figure was originally revealed, it exceeded Wall Street's expectations.

A visibly frustrated man lays his head on the table with a down stock chart in the background.

Image source: Getty Images.

"As linear TV spend accelerates its move to ad-supported CTV [connected TV], we believe growth from this secular trend will fuel our growth for the foreseeable future," CEO Michael Barrett said.

That statement is true: More households than ever are cutting the cord on traditional pay-TV, putting Magnite in a good position. Telaria and The Rubicon Project joined forces specifically to better seize this CTV opportunity. Therefore, it was encouraging to see this play out, with Magnite's CTV revenue growing 53% year over year in Q4.

This opportunity is why analysts love Magnite too. On Thursday, a Craig-Hullum analyst raised his price target for the stock to $72 per share, according to financial news website The Fly.

However, Magnite shareholders weren't waiting for $72 per share Thursday -- they were cashing out in the $50s and high $40s. The market was down in general, which likely played a role in the stock's decline. But it's also likely that traders don't see any big catalysts on the horizon, and are locking in some of their gains now that earnings are in. 

MGNI Chart

MGNI data by YCharts

Now what

Magnite stock has risen by more than 500% during the past six months. But for it to keep climbing, it will have to successfully integrate a significant new acquisition. On Feb. 5, Magnite announced it was purchasing rival sell-side advertising platform SpotX in an almost $1.2 billion deal. So far, the merger between Telaria and The Rubicon Project seems to be going well. So perhaps there's good reason to believe it can navigate this difficult process once again with SpotX.

If Magnite can, there's a lot of reasons to like the SpotX deal. First, the target is almost as big of a CTV player as Magnite. For comparison, Magnite generated $106 million in revenue in 2020 from CTV and online video. SpotX reportedly generated around $67 million from CTV last year.

Second, it seems Magnite is getting a comparatively good deal. SpotX shareholders will get a total of $560 million in cash and 14 million shares of Magnite for their company. When announced, that valued SpotX at just over 10 times trailing sales. Considering that Magnite stock trades at about 30 times trailing sales, the company is using its richly valued shares to finance acquiring a more cheaply valued company -- which could make this deal a steal if it works out.

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