Magnite's (MGNI 1.73%) stock recently rallied after the ad tech company posted its second-quarter earnings. Its revenue surged 170% year over year to $114.5 million, beating estimates by $20.8 million.
On an ex-TAC basis, which excludes its traffic acquisition costs, Magnite's revenue rose 139% to $100.4 million. On a pro forma basis, which normalizes year-over-year comparisons to account for its acquisition of SpotX in late April, its revenue increased 79%.
Magnite generated a net profit of $36.8 million during the second quarter, compared to a net loss of $39.1 million a year ago. Its adjusted EBITDA of $31.8 million also marked an improvement from its loss of $3.5 million a year earlier, but its non-GAAP EPS of $0.11 missed analysts' estimates by a penny.
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However, Magnite's guidance for 84% to 90% year-over-year revenue growth in the third quarter easily trounced analysts' expectations for 75% growth. That rosy outlook offset its slight earnings miss and brought back the bulls. So is Magnite's stock finally worth buying again, after it tumbled more than 40% over the past six months amid the broader sell-off in ad tech stocks?
Why did Magnite's stock stumble this year?
Magnite was formed by the merger of two ad tech companies, Rubicon Project and Telaria, last April. The new company became the world's largest independent sell-side platform (SSP) for ads.
SSPs enable publishers and digital media owners to manage and sell their ad inventories. They sit on the opposite end of the ad supply chain from demand-side platforms (DSPs) like The Trade Desk (TTD 4.15%), which let advertisers and media buyers bid on ad inventories.
Magnite, The Trade Desk, and many other ad tech stocks declined earlier this year as Apple (AAPL 0.64%) and Alphabet's (GOOG 1.25%) (GOOGL 1.27%) Google tightened their restrictions on targeted ads. Apple required users to opt in to targeted ads for iOS apps, and Google initially planned to block all third-party cookies on Chrome -- before postponing the changes to 2023 back in June.
The bears viewed those changes as existential threats to mobile and desktop-based ads, which still accounted for 71% of Magnite's ex-TAC revenues in the first half of 2021, and ad tech stocks like Magnite and The Trade Desk tumbled.
Meanwhile, the bulls claimed that mobile and desktop ads would likely evolve instead of disappearing, and that Magnite was already preparing for that shift with an aggressive expansion of its connected TV (CTV) business -- which serves up ads on streaming platforms and devices.
How rapidly is Magnite's CTV business growing?
When Rubicon merged with Telaria, its main goal was to absorb the latter's CTV business to reduce its dependence on desktop and mobile ads.
As Magnite, it continued that strategy by buying the video advertising company SpotX for about $1.14 billion -- which created the world's largest CTV and video ad platform. In early July, Magnite acquired SpringServe, another CTV ad serving platform, for approximately $31 million.
Magnite's ex-TAC CTV revenue surged 333% year over year to $34.3 million, or 34% of its total ex-TAC revenue, in the second quarter. That's up from just 19% of its ex-TAC revenue a year ago. On a pro forma ex-TAC basis, its CTV revenue increased 108%, with Magnite and SpotX both generating more than 100% year-over-year growth.
Magnite's ex-TAC desktop revenue rose 83% (52% on a pro forma basis) to $27.4 million during the quarter, while its ex-TAC mobile revenue increased 102% (75% on a pro forma basis) to $38.8 million. Those growth rates reflect a strong recovery in ad sales after the initial effect of the COVID-19 pandemic last year, and indicate Apple's big iOS changes -- which took effect in late April -- haven't significantly reduced its mobile revenues yet.
Magnite expects the CTV business to continue growing at a much faster rate than its desktop and mobile businesses. It already serves Disney, Roku, Samsung, and other CTV giants, and it should benefit from the death of traditional pay TV platforms and the secular expansion of the streaming market.
Magnite's stock still looks cheap
Magnite's liberal usage of "ex-TAC" and "pro forma" metrics might seem confusing, but the bull thesis is straightforward. The company is taking over the independent SSP market for CTV ads with aggressive acquisitions -- and its growth rates indicate it's on the right track.
Wall Street expects its reported revenues to rise 79% this year as its adjusted earnings more than triple. Next year, assuming Magnite doesn't make any more acquisitions, analysts expect its revenue and adjusted earnings to increase 30% and 43%, respectively.
We should take those forecasts with a grain of salt, but Magnite's stock seems cheap trading at just 10 times next year's sales. Meanwhile, eMarketer expects CTV ad spending in the U.S. to surge from $13.4 billion this year to $24.8 billion in 2024 -- which indicates Magnite's newly assembled empire of CTV ad services could have lots of room to grow over the next few years.
Magnite still faces some unpredictable uncertainties regarding its mobile and desktop businesses, but I still think it's a worthy long-term buy after its post-earnings pop.
