Two ad tech companies, Rubicon Project and Telaria, merged to create a new company called Magnite (MGNI 0.76%) last April.

If you had invested $1,000 in Magnite's stock right after the merger closed, your stake would be worth over $5,500 today. It would also have been worth as much as $13,700 back in February before its rally ran out of steam.

Let's take a look back at Magnite's meteoric rise, its year-long decline, and where this divisive ad tech stock might be headed in the future.

A family watches TV in bed.

Image source: Getty Images.

Why did Rubicon merge with Telaria?

Rubicon provided programmatic ads for mobile devices and PCs, while Telaria developed a software platform for managing ads for streaming video and connected TV (CTV) platforms. Rubicon wanted to diversify into the CTV market to reduce its dependence on mobile and PC ads, while Telaria needed Rubicon's programmatic technologies to reach more ad sellers.

Merging the two companies introduced Magnite as the world's largest independent SSP (sell-side platform). SSPs help media owners manage and sell their ad inventories, and sit on the opposite end of the ad supply chain as DSPs (demand-side platforms) like The Trade Desk, which let buyers bid on those ad inventories.

Earlier this year, Magnite bought two additional CTV companies, SpotX and SpringServe, to further accelerate the expansion of its CTV business.

Why did Magnite's stock initially skyrocket?

Magnite's stock initially soared for four main reasons.

First, the company's combined revenue growth looked very impressive. Its revenue surged 42% to $221.6 million in 2020. Its desktop revenue rose 16% to $79 million, its mobile revenue rose 23% to $108.4 million, and its new CTV business generated $34.3 million in revenue.

Second, its combined profits were rising. Its adjusted EBITDA margin rose three percentage points year over year to 19% in 2020, while its adjusted EBITDA increased 68% to $43.1 million.

Third, investors were dazzled by the growth potential of the CTV market, which would benefit from the slow death of "linear TV" platforms like cable and satellite TV. eMarketer expects spending on CTV ads in the U.S. to jump from $9.03 billion in 2020 to $24.76 billion in 2024, and companies like Magnite and Roku are well-positioned to profit from that secular trend.

Lastly, Magnite's stock initially seemed cheap relative to its growth. In early April, Magnite only had a market cap of about $500 million -- just over two times the revenue it would eventually generate in 2020.

Why did Magnite's rally end?

Magnite gained more attention in early 2021, then skyrocketed to an all-time high of $64.39 during the Reddit-fueled buying frenzy in February.

Magnite's market cap briefly topped $7 billion, or 17 times this year's sales, before that unsustainable rally fizzled out. The stock subsequently declined to the mid-$20s by May as the company faced three new concerns.

First, Apple (AAPL 0.33%) rolled out a controversial iOS update that allowed its users to opt out of data-mining features and targeted ads. Second, Alphabet's (GOOG 0.14%) (GOOGL 0.11%) Google announced it would ban all third-party cookies in its Chrome browser.

Those two platform changes raised red flags for Magnite's mobile and PC businesses, respectively, and put more pressure on its CTV business to expand. Google postponed its cookie ban to 2023 in June, but Apple's changes are already generating some brutal headwinds for some mobile advertisers.

Second, investors realized that Magnite was relying heavily on acquisitions, like SpotX and SpringServe, to boost its revenue. Here's how wide the gap was between its reported revenue, which includes those acquisitions, and its pro forma revenue, which excludes them, in the first half of 2021:

Revenue Growth (YOY)

Q1 2021

Q2 2021







Source: Magnite. YOY = Year-over-year. *Excluding traffic acquisition costs.

Magnite's change in reporting its revenue on an ex-TAC (excluding traffic acquisition) basis in the second quarter -- which it believes is a better gauge of its growth after the SpotX acquisition -- further confused investors.

Lastly, it's unclear if Magnite's stock is still a worthwhile investment at eight times this year's sales. Analysts expect its revenue to rise 90% this year, but most of that growth will be inorganic. Next year they expect its revenue to increase 31% -- but it's still unclear if the slower growth of its mobile and desktop businesses will offset the expansion of its CTV business.

I still believe in Magnite's growth potential

Magnite's business model can be confusing, but investors should tune out the noise and notice its CTV business generated 29% of its ex-TAC revenue in the first half of 2021 -- up from just 10% in the first half of 2020.

That percentage will likely continue rising and offset its potential challenges in the mobile and desktop markets. The road ahead could be bumpy, but Magnite still plans to grow its annual revenue by about 25% over the next few years, while potentially doubling its adjusted EBITDA margins -- so its stock could still have plenty of upside potential for patient investors.