Before PubMatic (PUBM -3.73%) went public in late 2020, supply-side advertising technology platform Magnite (MGNI 0.38%) was the unquestioned publicly traded leader in the space. As Magnite frequently tells investors, it is the largest independent supply-side advertising platform.
Furthermore, Magnite boasts a larger market capitalization than PubMatic, setting it apart from PubMatic as the more popular stock with investors; Magnite's market capitalization is about $3 billion and PubMatic's is 50% lower at around $2 billion.
But which stock is more attractive at their current valuations? Let's compare the two stocks head to head to see which one looks like the better buy.
On the surface, some investors may mistakenly think Magnite has been growing faster than it really is. The top bullet point in the company's third-quarter earnings release, for instance, reads, "Revenue of $131.9 million for Q3 2021, up 116% from Q3 2020." But astute investors will pay more attention to the metric buried at the end of the second bullet point, following two other metrics: On a "pro forma" basis, revenue grew 26% year over year during the period.
Magnite's pro forma revenue growth rate does a better job of showing the momentum of the company's entire business, as it adds the full quarterly revenue from recently acquired SpotX and SpringServe into the year-ago results so that the business units are in both the year-ago quarter and the third quarter of 2021 for comparison's sake.
Furthermore, Magnite is notably up against a rather easy comparison -- at least from what we can see. While we don't know the year-ago growth rates for SpotX and SpringServe since the two companies weren't acquired until 2021, investors should note that Magnite's pro forma revenue growth rate in the third quarter of 2020 was just 12%.
But credit goes where credit is due: In the ad tech space, size has historically mattered. As publishers and marketers increasingly aim to optimize the ad-tech supply chain, clients on both sides are aggregating to a more manageable, smaller number of partners.
And Magnite's leading size may prove to be the edge needed for the company to stay ahead over the long haul. The company's recent acquisitions also mean its bench is stacked with hundreds of engineers and product specialists -- an asset that could pay massive dividends down the road.
Magnite's pro forma growth absolutely pales in comparison to PubMatic's four quarters in a row of 50%-plus organic year-over-year growth rates. The company is benefiting from a surge in impressions served on its platform. Third-quarter impressions were 23.9 trillion, up 103% year over year "as publishers continued to expand their inventory on the PubMatic platform," management explained in the company's third-quarter earnings release.
Furthermore, PubMatic is very profitable, bringing in $28.4 million of net income over the trailing nine months. This is up from $7.8 million in the year-ago period, highlighting the scalability of PubMatic's business. With the bulk of PubMatic's development team operating offshore in India, the company has a cost advantage over Magnite. In addition, since PubMatic operates its own infrastructure, it's not reliant on public cloud providers, adding further to the company's margin. PubMatic says these cost advantages enable the company to reinvest and innovate quickly.
PubMatic's momentum with customers is clear in two areas in particular. First, PubMatic entered into a record number of supply path optimization deals with advertisers during its most recent quarter, meaning more ad buyers are making stickier commitments to PubMatic's inventory for high-volume discounts.
Second, PubMatic's nascent connected TV (CTV) product offering is seeing significant momentum, evident by the 154 CTV publishers it had programmatically monetizing inventory on its platform during Q3, up from 114 in the second quarter.
But with about $58 million in third-quarter revenue, compared to Magnite's $131.9 million, the company is still much smaller. This could make its path to supply path optimization of large CTV customers and other heavyweight publishers comparatively difficult.
Which stock is a better buy?
There's no easy choice when it comes to trying to pick the more attractive stock. If anything, PubMatic's faster organic growth rate despite being the smaller company shows just how competitive the supply side of ad tech is. Guessing the winner over the next 10 years, therefore, is no easy task.
With PubMatic's business fundamentals looking more attractive, and with the stock trading substantially cheaper relative to its net income momentum, I'll side with PubMatic for now. But investors will have to watch closely how the supply side industry dynamics develop in the coming quarters and years, as it's unclear yet whether a particular company will emerge with a significant edge.