Magnite Stock: Bear vs. Bull

Magnite's (MGNI 1.70%) stock hit an all-time high of $64.39 per share during the Reddit-fueled "meme stock" rally last February. But today shares of the advertising technology company hover near a 52-week low of about $15.

Magnite became the largest independent SSP (sell-side platform) for digital ads after it was formed by the merger of two smaller ad tech companies, The Rubicon Project and Telaria, in April 2020. SSPs enable publishers and digital media owners to manage and sell their own ad inventories.

At first, investors were impressed by Magnite's connected TV (CTV) business, which was growing at a much faster rate than its desktop and mobile ad businesses. However, Magnite's subsequent acquisitions exposed a troubling gap between its organic and inorganic growth, and it wasn't growing as rapidly as many of its ad tech peers on an organic basis.

Image source: Getty Images.

But have investors overreacted and turned this growth stock into a value stock? Let's review the bear and bull cases to find out.

What the bears will say about Magnite

The bears will claim that Magnite is too dependent on acquisitions, including its initial merger and its purchases of SpotX and SpringServe last year, to generate fresh growth for its closely watched CTV segment.

They'll point out there's a big gap between Magnite's reported revenue growth and its pro forma revenue, which normalized those year-over-year comparisons for its acquired businesses and started excluding its traffic acquisition costs (ex-TAC) following its takeover of SpotX last April.

Source: Magnite. YOY = Year over year. *Ex-TAC basis.

Magnite's pro forma revenue growth decelerated significantly in the third quarter and spooked the bulls. The organic growth of its CTV business also decelerated, even as it accounted for a larger percentage of its top line.

Source: Magnite. Pro-forma. YOY = Year over year. *Ex-TAC basis.

Magnite blamed that slowdown on supply chain challenges that throttled ad purchases from certain customers, especially across the auto sector. It expects those headwinds to continue into the fourth quarter.

If we only take into account Magnite's organic growth, it's growing at a much slower rate than The Trade Desk (TTD 3.29%), which sits on the opposite end of the ad supply chain as the largest independent demand-side platform (DSP) for digital ads. DSPs help trade desks, ad agencies, and advertisers bid on ad inventories and manage their ads.

The Trade Desk hasn't made any major acquisitions since 2017, but its revenue still rose 55% year over year in the first nine months of 2021. It also attributed a lot of that growth to the expanding CTV market. Therefore, The Trade Desk's robust organic growth (and more straightforward reporting methods) might make it a more appealing investment than Magnite.

Lastly, Magnite's insiders have sold roughly twice as many shares as they bought over the past 12 months as its stock price plunged. They also sold nearly 50 times as many shares as they bought over the past three months.

What the bulls will say about Magnite

The bulls will point out that Magnite's near-term headwinds are temporary. Its recent deceleration was exacerbated by tough year-over-year comparisons to the surge in political ad sales in 2020, and its supply chain headwinds will likely ease as the auto market recovers.

Magnite also hasn't been affected by Apple's privacy changes on iOS -- which hurt targeted advertising players like Meta Platforms and Snap last year -- since it doesn't participate in app downloads and barely provides any social advertising.

As a result, Magnite's desktop and mobile revenues both continue to rise at high double-digit percentage rates. Its margins are also still expanding on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.

Source: Magnite.

Magnite's long-term forecasts, which it made public during its investor day last September, also remain intact. To recap, it expects to generate more than 25% annual revenue growth (on an organic basis) with an adjusted EBITDA margin of 35%-40% over the next few years.

Over the next "five-plus" years, it expects to process $15 billion to $20 billion in ad spending annually, compared to "several billion" dollars today. It also expects its share of the CTV market to rise from about 20%-25% today to more than 30% as the entire market grows more than five times larger.

Investors should take those rosy estimates with a grain of salt, but they certainly seem high for a stock that trades at less than four times next year's sales. The Trade Desk trades at 24 times next year's sales.

Should investors buy Magnite today?

I own some shares of Magnite, and I won't sell my position anytime soon. However, I'm also reluctant to add more shares now, since the fourth quarter could be rough and the company's insider sales are still raising red flags.

If you don't already own Magnite, it may be smarter to see how it fares after it releases its fourth-quarter report in February before buying this volatile stock.