Magnite (MGNI -2.08%) took investors on a wild ride after it was created by the merger of Rubicon Project and Telaria last April. After becoming the world's largest independent sell-side ad tech company, Magnite's stock skyrocketed from about $5 to the low $60s this February.

However, the stock plunged to the mid-$20s in May before rebounding to the low $30s. That volatility indicates Magnite is still a fierce battleground stock. Let's see if the bulls or bears are winning.

A person watches TV at home while sitting on the couch under a blanket.

Image source: Getty Images

How does Magnite make money?

Magnite operates a sell-side platform (SSP), which enables publishers and digital media owners to manage and sell their own ad inventories.

SSPs are different from demand-side platforms (DSPs), which let advertisers and media buyers bid on those ad inventories. The Trade Desk (TTD -4.34%) is the world's largest independent DSP provider.

Magnite and The Trade Desk are the top "independent" players in their respective sides of the ad supply chain, but they both compete against diversified digital advertising platforms like Alphabet's (GOOG -1.10%) (GOOGL -1.23%) Google, which provides both SSP and DSP services.

But Magnite targets companies that want to sell their ad inventories on more platforms beyond Google's walled garden. It serves those ads across desktop, mobile, and connected TV (CTV) platforms, but its CTV business is its main growth engine. Big companies like Disney, Roku, and Samsung all use its SSP services.

What the bulls will tell you about Magnite

Magnite's predecessor, Rubicon, repeatedly expanded via acquisitions before finally merging with Telaria. It continued that strategy by acquiring the video advertising platform SpotX earlier this year.

That acquisition makes Magnite the world's largest independent CTV and video ad platform -- which makes it a promising investment on cord cutting and the rise of ad-supported streaming platforms.

Magnite's revenue rose 42% to $221.6 million in 2020. Its desktop revenue increased 16% to $79 million, its mobile revenue rose 23% to $108.4 million, and its CTV business -- which wasn't included in Rubicon's results a year earlier -- generated $34.3 million in revenue.

A TV viewer uses a remote.

Image source: Getty Images.

It generated 45% of its pro forma revenue from video ads across all its desktop, mobile, and CTV platforms, and its takeover of SpotX should further boost that percentage this year. Its full-year adjusted EBITDA increased 68% to $43.1 million.

In the first quarter of 2021, Magnite's revenue rose 67% year over year to $60.7 million, and its adjusted EBITDA more than tripled to $9.4 million. Its desktop and mobile revenues rose 42% and 58%, respectively, while its CTV business generated a fifth of its revenue.

Analysts expect Magnite's revenue to increase 79% to $395.9 million this year, with the SpotX acquisition providing a big boost, and grow another 30% to $514.3 million in 2022 after it laps the acquisition date. On the bottom line, they expect Magnite's adjusted earnings per share (EPS) to soar about 250% this year and rise 42% in 2022.

Magnite's growth rates indicate there's a lot of pent-up demand for online video and CTV ads that aren't tethered to a dominant digital advertising platform like Google. The CTV market could still grow at a compound annual growth rate (CAGR) of 23% between 2020 and 2024, according to eMarketer, and easily outpace the growth of the saturated desktop and mobile markets.

Magnite's stock trades at 55 times forward earnings and 14 times this year's sales. Those valuations are still fairly low relative to its growth rates.

What the bears will tell you about Magnite

Magnite's headline numbers look solid, but it's still unprofitable on a GAAP basis. Its net loss more than doubled to $53.4 million in 2020, then widened year over year from $9.7 million to $12.9 million in the first quarter of 2021.

Magnite was still sitting on $468.6 million in cash and equivalents last quarter, but most of that total came from a $350 million convertible debt offering in March. That caused its debt-to-equity ratio to jump from 1.5 to 2.5 -- and that's before it closed its $1.14 billion takeover of SpotX in April.

Magnite funded the deal with $640 million in cash and 12.4 million shares of its own stock. Therefore, investors should expect Magnite's share count (which more than doubled year over year in the first quarter) and debt levels to continue climbing for the foreseeable future.

Apple's (AAPL -1.22%) privacy changes on iOS 14, which require users to opt-in to targeted ads, and Google's ban on third-party cookies on Chrome could also affect Magnite's mobile and desktop businesses. Magnite is proactively countering those challenges by expanding its CTV business, but it still generates a lot of its revenues from those older platforms.

The bulls could be right

Investors shouldn't ignore Magnite's losses and messy balance sheet, but I think it still has the potential to generate more multi-bagger gains. It's still growing rapidly, it dominates a high-growth niche, and its stock is surprisingly cheap. The ride could be bumpy, but its strengths still easily outweigh Magnite's weaknesses.