The advertising technology (or adtech) space is a complicated industry, yet it has the potential to provide immense returns over the next 10 years. Adtech companies help advertisers effectively deliver ads to a targeted audience by using technology to make the process more efficient and valuable. Instead of an advertiser placing ads in front of a broad audience like in a newspaper, adtech companies find the most efficient places for advertisers to place their ads. These companies work for both publishers and advertisers, making sure that publishers make the most money while advertisers place ads in front of the target audience.
With the global ad spend in 2024 expected to reach $526 billion, the opportunity in this market is massive, but where should investing money go? Magnite (MGNI +0.93%) and PubMatic (PUBM +0.73%) are the two front-runners on the sell side, but which company is a better buy today?
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1. Magnite: The market leader
Magnite is the market leader of sell-side advertising platforms -- which are adtech companies that represent publishers looking to sell ad space on their website. Sell-side companies monitor bids and offers for the publishers, making sure the publisher gets the best price for their ad space. Magnite became the market leader as a result of a merger of The Rubicon Project and Telaria in April 2020. The company has only earned $318 million in revenue during the trailing 12 months, so while it is the market leader, it still has little penetration of its addressable market of global ad spending.
Being the market leader, the company has landed big-name customers like Walt Disney and Roku, along with 2,100 other customers, maintaining a net retention rate of 134%. This impressive customer base and Magnite's ability to convince its customers to pay more has led to strong financial growth. In Q2 2021, revenue grew 170% to $114.5 million from the year-ago quarter, and net income increased to $36.8 million from a net loss of $39.1 million in the year-ago quarter. Free cash flow was strong as well, coming in at $11 million in free cash flow in the first two quarters of 2021.
This growth was spurred by two factors. The first being that this growth was helped by its acquisition of SpotX, and without this deal, revenue growth would have been much lower. Second, Magnite had a very easy comparison in the second quarter of 2020 when pro forma revenue declined 24% year over year as the company faced significant headwinds due to reduced advertiser spend during the peak of the pandemic. Therefore, while 79% pro-forma growth is impressive, it is not likely that this growth would continue.
Despite its impressive customer list and strong financial position, there are plenty of risks with Magnite. Mainly, all adtech companies have the risk of regulations from Alphabet's Google and Apple, both of which have made plans to get rid of cookies -- an important data source on consumers for adtech companies. Another concern for Magnite is its lack of focus on artificial intelligence (AI) and machine learning -- a critical tool that PubMatic and buy-side companies like The Trade Desk use to create a more valuable process for all parties involved. This opens up the risk of being upended by competitors capturing the benefits of AI that have historically disrupted other industries.
2. PubMatic: The promising underdog
One company that has been successful (so far) in capturing the advantages of AI in the adtech space is PubMatic. Like Magnite, PubMatic operates on the sell side, but it has a few unique traits that separate it from the pack. First, its use of AI is optimizing the bidding process by enabling the company to take on more bids, allowing publishers to get an even better deal for their ad space. PubMatic's AI-based bidding system also helps advertisers whose ads are being analyzed and placed on the best platform for them -- providing advertisers quality service.
PubMatic's second unique edge is that it owns its own data infrastructure. Whereas competitors like Magnite store data on third-party providers, PubMatic keeps it in-house on its own tech stack. This allows the company to have amazingly low operating costs -- which has led to this small company already achieving profitability. In the second quarter of 2021, the company reached a net income of $10 million, which represented 20% of its quarterly revenue of $50 million. Revenue grew 88% from the year-ago quarter, likely due to its net retention rate of 150%. This net retention rate demonstrates how valuable PubMatic's platform is to publishers, showing that the company's platform and AI are effective at getting its customers the best deal possible.
The company's tech stack, while a great financial benefit, could cloud management's view. If its infrastructure has flaws, or management's focus is put on its back-room operations rather than the company's growth, competitors could beat it out.
The long-term winner -- PubMatic
While a very close call, the better buy today is PubMatic for two reasons. First, the company's two unique traits could serve as amazing competitive advantages that would be incredibly hard for any company to replicate. This gives PubMatic a strong edge over its competitors. Second, PubMatic has a much bigger growth runway. At just eight times sales, PubMatic is cheaper than Magnite -- which trades at 10 times sales -- and PubMatic's market cap is just half of Magnite's $3 billion market cap at roughly $1.4 billion.
Although the growth runway is extremely long for both companies, PubMatic could double before each company's runway is the same size. That, along with its strong competitive advantages -- which aren't being valued into the stock price -- makes me more interested in PubMatic as a long-term investment than Magnite.
