Stock for Magnite (MGNI -3.48%), which owns the top independent sell-side platform (SSP) for digital ads, has lost nearly 30% of its value over the past six months. Concerns about Apple's (AAPL -1.96%) privacy update for iOS, Alphabet's (GOOG -1.24%) (GOOGL -1.02%) upcoming ban on third-party cookies for Google Chrome, and Magnite's dependence on acquisitions have all caused investors to shun the stock.
However, Magnite recently addressed some of those concerns at an investor day event on Sept. 15. Let's review the main highlights, how they support three major reasons to buy Magnite's stock, and weigh them against a bearish take to see if the stock is still worth buying.
1. Magnite has ambitious long-term plans
During its investor day, Magnite set a long-term growth target for more than 25% annual revenue growth with an adjusted EBITDA margin of 35%-40% -- which would represent a significant expansion from its adjusted EBITDA margin of 19% in 2020 and 26% in the first half of 2021.
Magnite estimates that over the next "five-plus" years it will process $15 billion to $20 billion in ad spending annually, compared to "several billion" dollars today. It aims to capture over 30% of the CTV (connected TV) advertising market, compared to a 20%-25% share today, as the entire programmatic CTV market expands from $9 billion to $50 billion. It also plans to grow its share of the DV+ (display, video, and other formats) market from the mid- to high-single digits to over 20%.
If Magnite can grow its revenue more than 25% annually over the next few years, its revenue would more than double from an estimated $421.5 million this year to over $1.03 billion in 2025. If it achieves its adjusted EBITDA margin target, it could generate $360 million to $412 million in adjusted EBITDA in 2025 -- compared to its adjusted EBITDA of just $43 million in fiscal 2020.
2. CTV will become Magnite's core business
In the first half of 2021, Magnite generated 29% of its ex-TAC (excluding traffic acquisition costs) revenue from CTV ads. Mobile ads accounted for 42% of that revenue, while desktop ads accounted for 29%.
Magnite's mobile business is vulnerable to Apple's recent iOS update, which lets users opt out of targeted ads. Its mobile and desktop businesses could also be hurt by Google's planned ban on all third-party cookies in Chrome (which collect data for targeted ads) in 2023. Magnite also faces plenty of competitors in both markets.
To pivot its business away from mobile and desktop ads, Magnite has been aggressively expanding its CTV platforms, which provide integrated ads for streaming video platforms like Roku, to profit from the growth of streaming services and the death of "linear TV" platforms like cable and satellite TV.
Magnite has focused on the expansion of its CTV business ever since it was created through the merger of two ad-tech companies, The Rubicon Project and Telaria, last April. That's why Magnite subsequently acquired two other CTV ad-tech companies -- SpotX and SpringServe -- this year.
During its investor day presentation, Magnite predicted that its CTV platform would generate the "majority" of its revenue in the future. Therefore, Magnite will likely continue to buy smaller CTV companies to expand the business and reduce the weight of its mobile and desktop ads.
3. Magnite has a reasonable valuation
Magnite's stock currently trades at 31 times forward earnings (on a non-GAAP basis) and nine times this year's sales. Those valuations look reasonable relative to its long-term growth potential.
The Trade Desk (TTD -0.30%), which sits on the opposite end of the ad supply chain as the world's top independent DSP (demand-side platform), trades at 86 times forward earnings and 29 times this year's sales. The Trade Desk isn't as dependent on acquisitions as Magnite, and analysts expect its revenue to rise 40% this year and 29% next year.
The reason to sell Magnite: A lack of insider confidence
Magnite's management has painted a rosy picture of the future, but it isn't backing up those claims with big stock purchases. Over the past 12 months, Magnite's insiders actually sold 1.69 million shares, while only purchasing 612,376 shares.
It's easy to see why Magnite's executives might want to take profits, since its stock price has more than quadrupled over the past 12 months. However, the lack of big insider purchases suggests that its near-term growth could remain tepid as it continues to expand its CTV business.
Do Magnite's strengths outweigh its weaknesses?
Over the past year, I've accumulated a position in Magnite with an average price of around $30 per share because I believe it still has plenty of room to expand in the CTV and DV+ markets.
I'm not too concerned about the insider sales or its near-term dependence on acquisitions, and I believe its organic growth should stabilize in the future as the CTV market expands. If you agree with those points, you should take a much closer look at this under-the-radar ad technology stock.