Please ensure Javascript is enabled for purposes of website accessibility

1 Under-the-Radar Growth Stock to Buy in November

By Jamie Louko – Updated Nov 12, 2021 at 11:17AM

Key Points

  • Magnite is the leader in the sell-side adtech industry.
  • It did not come to be the leader organically, but it is still growing fast.
  • This stock looks very undervalued, making it an appealing buy this month.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Despite its cheap valuation, this company reported triple-digit percentage growth in its latest quarter.

Finding stocks that are growing fast but are still undervalued is no easy task. When you do find one, it can be a great company to add to your portfolio.

So what would you do if I told you there was a stock out there whose price had fallen 65% from 52-week highs set in February but had also just reported 116% third-quarter year-over-year revenue growth and is valued at only 8.9 times sales?

Those metrics describe Magnite (MGNI 1.67%), an online advertising tech company that is growing massively while still being relatively cheap, especially when compared to lots of high-flying growth stocks today. 

Let's talk about why this under-the-radar stock might just be a great buy in November.

Groups of friends laughing while on their phones.

Image source: Getty Images.

Leading a fast-growing industry

Magnite competes on the sell-side of the advertising technology (adtech) industry, meaning it represents publishers looking to sell ad space. Magnite works with advertisers or buy-side adtech companies -- companies representing advertisers -- to sell its publishers' ad space to the highest bidder. Magnite's priority is the publisher -- making sure they make the most money for their ad space -- but the company also helps advertisers find the most effective way to reach their target audience.

Magnite is a leader among sell-side adtech companies, yet its market cap is just $3.6 billion -- showing how underpenetrated the adtech space is. Global digital ad spend is expected to increase from $325 billion (2019 level) to $526 billion by 2024, which works out to a 10% compound annual growth rate. That suggests there is plenty of growth for the industry at large -- with Magnite potentially being the biggest beneficiary.

The company grew to become the market leader through a merger of equals -- The Rubicon Project and Telaria -- back in April 2020. The company has then acquired other businesses, including SpotX and SpringServe, to further its growth in connected TV (CTV). 

Because of its size and leadership, Magnite has attracted impressive customers, including Disney, Roku, and the NBA. Magnite focuses on CTV -- advertising on streaming services to increase revenue per user while controlling the user experience for publishers -- and the company sees it as the main growth opportunity for itself into the future. 

Proving its worth

So far, the company's growth strategy has been paying off. Magnite announced third-quarter earnings on Nov. 3, reporting revenue growth of 116% to $132 million. Revenue from CTV reached $43 million, growing 51% when factoring in revenue from SpotX or SpringServe. The company's acquisition of SpringServe closed on July 1.

The company's net loss increased substantially -- faster than revenue. Its net loss for Q3 2021 was $24.3 million, which grew 131% from Q3 2020's net loss of $10.5 million. This led to the company's net loss margin increasing from 17% of revenue to 18.4% of revenue.

While small, this loss should be moving in the opposite direction for a company that is leading the industry. This was driven by sales and marketing expenses that more than doubled year over year, from $22 million to $52 million.

The company has consistently been near profitability in the past two quarters, so the company's net loss overall this year is $0.4 million. Its free cash flow this year has been $34 million, which more than covers its net loss for the year. For a company that has 100%-plus revenue growth, strong free-cash-flow generation, and profits nearing breakeven, having a valuation at just 8.9 times sales is very appealing. 

What could go wrong

The main problem that investors have with Magnite is that a lot of its growth is coming from acquisitions rather than from organic growth. This could be seen in Q3, where the company only grew its pro-forma revenue by 26% when not counting its acquisitions. If a growth by acquisition model does not worry you, then this is something you can sweep under the carpet, but there are many investors (myself included) who pause when they see a company that is growing primarily by acquisition. 

The other primary risk is that Magnite could get hit by privacy changes being made to operating systems of Alphabet's Google and Apple. Both companies have indicated plans to limit access to cookies. Cookies are an important data source for advertisers who advertise online and on mobile phones, so getting rid of cookies would make Magnite's mobile and web ads less effective and less valuable.

However, CTV ads do not face this risk. Considering that is where Magnite's focus is, this risk is less important than it would be for other adtech companies like The Trade Desk.

The bottom line is that Magnite's growth is incredible as a market leader, and considering how big ad spending could get, future growth potential is massive. Buying a market leader that is growing rapidly at just 8.9 times sales is a steal, which is why I think Magnite is potentially a top stock for you to buy this month.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamie Louko owns shares of Apple, Roku, The Trade Desk, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Magnite, Inc, Roku, The Trade Desk, and Walt Disney. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.