Magnite's (MGNI +1.89%) stock sank 16% on Nov. 4 to its lowest levels of the year after the ad tech company posted a mixed third-quarter earnings report. But did the market overreact and create an attractive buying opportunity for long-term investors? Let's unpack the key points to find out.
Understanding Magnite's financials
Magnite, which was created by the merger of The Rubicon Project and Telaria last April, is the world's largest independent sell side platform (SSP) for digital ads. SSPs help publishers and digital media owners manage and sell their ad inventories.
Magnite has been relying heavily on acquisitions to expand its connected TV (CTV) business, which should benefit from the death of "linear TV" platforms and reduce its dependence on the desktop and mobile markets.
That inorganic expansion, which included its acquisitions of SpotX and SpringServe earlier this year, often inflates its reported revenue. To tune out that noise, investors should focus on its "pro forma" growth rates, which normalize the year-over-year comparisons for its new businesses.
Image source: Getty Images.
After Magnite closed its acquisition of SpotX in April, it added a new "ex-TAC" (excluding traffic acquisition costs) metric to its total revenue. Magnite believes its ex-TAC revenue presents a clearer picture of its growth before absorbing the traffic acquisition costs, which fluctuate from quarter to quarter.
Therefore, investors should probably focus on Magnite's pro forma ex-TAC revenue instead of its reported growth. They should also pay more attention to its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- which exclude its acquisition-related expenses, stock-based compensation, and other one-time expenses -- instead of its reported earnings.
How fast is Magnite growing?
Magnite's reported revenue rose 116% year over year to $131.9 million during the third quarter, which beat estimates by $16.8 million. Its pro forma ex-TAC revenue increased 26% to $114.1 million.
That pro forma growth was consistent with Magnite's long-term goal of generating 25% annual revenue growth, which it set at its investor day in mid-September. However, Magnite's revenue growth still decelerated on a reported and pro forma ex-TAC basis in the third quarter:
|
Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
|---|---|---|---|
|
Revenue |
67% |
139% |
116% |
|
Pro-Forma Revenue |
18% |
79%* |
26%* |
Source: Magnite. YOY = Year-over-year. *Ex-TAC basis.
Magnite's closely watched CTV revenue rose more than 50% year over year on a pro forma basis in the third quarter, but that marked a significant slowdown from its growth of over 100% in the second quarter.
During the conference call, Magnite CEO Michael Barrett blamed the slowdown on "supply chain-related ad cancellations," in which big advertisers (particularly automakers) reduced their spending to deal with logistics challenges and component shortages, as well as tough comparisons against its robust sales of political ads in the prior-year quarter. Barrett says the supply chain headwinds will be "temporary", but he still expects them to drag on into the fourth quarter.
On the bright side, Magnite doesn't have much exposure to Apple's (AAPL 1.14%) latest privacy update for iOS -- which significantly hurt Meta and Snap in their latest quarters -- since it doesn't participate in app-install downloads and provides very little social advertising.
Magnite's mobile and desktop businesses both generated high double-digit ex-TAC revenue growth during the third quarter, which should allay some concerns that its legacy businesses will burn out before its CTV business becomes its biggest business. Its CTV business already generated 38% of its ex-TAC revenue during the third quarter, up from just 18% a year earlier.
Expanding adjusted EBITDA margins
On the bottom line, Magnite's adjusted EBITDA surged 192% to $40 million, which boosted its adjusted EBITDA margin from 23% to 35%.
Magnite expects its adjusted EBITDA expenses to rise sequentially in the fourth quarter as it faces higher cloud computing, marketing, and real estate costs. Nonetheless, the company still reiterated its long-term goal of maintaining an adjusted EBITDA margin of 35% to 40%.
However, the market seemed fixated on Magnite's adjusted earnings per share (EPS), which rose 133% to $0.14 but missed expectations by two cents. On a generally accepted accounting principles (GAAP) basis, its net loss also widened from $10.5 million to $24.3 million.
That earnings miss, which was likely caused by its aforementioned supply chain headwinds, was arguably minor. Its GAAP net loss also wasn't surprising, since it's been relying heavily on acquisitions to expand its CTV ecosystem.
The guidance and valuations
Magnite expects to generate $138 million to $142 million in revenue on an ex-TAC basis in the fourth quarter, which would represent 21% to 24% sequential growth from the third quarter. The exact year-over-year comparisons are a bit unclear, since Magnite didn't report its revenue on an ex-TAC basis a year ago, but analysts expect its reported revenue to rise 73% year over year.
Analysts expect Magnite's reported revenue to rise 92% for the full year and 30% next year, assuming it doesn't make any other big acquisitions. Those estimates, along with Magnite's long-term growth targets, indicate the stock is undervalued at five times next year's sales.
Magnite's reporting methods are confusing, but investors should focus on three things: The CTV market is still expanding, Magnite's long-term growth targets are intact, and its stock is cheap. Those strengths all indicate Magnite's post-earnings plunge is an excellent buying opportunity.
