Shares of digital advertising software firm Magnite (MGNI -3.71%) have been clobbered in recent months and are now trading at less than half their all-time high back in February. However, though Magnite has been caught up in the tech stock sell-off this spring, long-term shareholders still have lots to be happy about. The stock is still up 333% over the last trailing 12-month stretch as of this writing.
As great a run as it has been, there's still plenty of potential here as the digital advertising industry continues to grow -- especially connected TV (CTV) as marketers migrate over to the myriad of new streaming platforms that have come online the last couple of years. With a great start to 2021, Magnite looks like a buy again.
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1. The leader in streaming TV ads
Magnite's first-quarter 2021 revenue was $60.7 million, up 18% from the year prior on a pro forma basis (Magnite is the result of merger between Telaria and The Rubicon Project last summer). Adjusted EBITDA was $9.4 million compared to just $2.8 million for the same period in 2020.
At the end of April, Magnite also completed its acquisition of SpotX -- forming the largest stand-alone CTV software platform. During the first quarter, SpotX's revenue increased 45% year over year to $31.2 million when excluding traffic acquisition costs, of which $19.7 million was CTV. SpotX CTV revenue represented a 70% annual increase. Magnite's Q1 CTV sales were $12.0 million (up 32%), so this fast-moving segment will more than double in size with the integration of SpotX and represent about one-third of total sales.
2. Sea change in TV is underway
This is great news for investors because CTV is expected to continue expanding at a rapid pace for the foreseeable future. Most TV marketing is still done via linear channels (think cable) rather than on a streaming platform. In fact, traditional TV is still the largest advertising segment around the globe, accounting for some $150 billion a year in spending. But that's beginning to change as many of those dollars are quickly migrating to CTV and other internet video-based marketing campaigns.
The tie-up between Magnite and SpotX creates a large and fast-growing player in this space. CTV revenue after traffic acquisition costs is expected to be $30 million to $34 million in the second quarter of 2021 (which does not include SpotX results in April since the merger wasn't finalized until the end of the month). On a pro forma basis accounting for all CTV lines a year ago, Magnite says its CTV segment will grow at least 90% year over year. Plus, as a result of the merger of the two CTV software companies, the total adjusted EBITDA profit margin is expected to improve to 27%, up from just 15% in Q1. Clearly, CTV is a big multi-billion-dollar-a-year opportunity for Magnite since it helps its content producer customers monetize their videos by pairing them up with a marketing firm.
3. Shares look like a bargain again
After the Q1 update and the sharp drop in stock price, Magnite looks like a long-term value again. With a market cap of $3.4 billion, shares trade for about 14 times trailing 12-month sales and about 68 times trailing 12-month adjusted EBITDA. Given how rapidly the company is growing -- especially in the CTV space -- and the even faster pace of profit growth as the software outfit reaches a more efficient scale, it's not such an expensive stock for those eyeing its potential at least a few years down the road.
The sell-off has been brutal so far this spring, but Magnite is still on an epic tear from where it was last year. This small firm nevertheless has plenty more upside in the years ahead as digital advertising continues to migrate away from traditional TV and other nondigital marketing outlets. Keep Magnite stock on your watchlist.
