Is Magnite Stock a Buy Now?

Magnite's (MGNI 4.43%) stock price jumped 18% on Feb. 24 following its fourth-quarter earnings report.

The advertising technology, or adtech, company's revenue rose 97% year over year to $161.3 million, which beat analysts' estimates by $21.5 million. Excluding traffic acquisition costs (TAC), its revenue rose 76% to $142.1 million. On a pro forma basis, which normalizes the comparisons for its acquisitions of Telaria, SpotX, and SpringServe, its ex-TAC revenue increased 10%.

On a generally accepted accounting principles (GAAP) basis, Magnite's net income declined 92% to about $500,000 as it integrated its recent acquisitions. However, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 125% to $67.5 million. Its non-GAAP earnings also grew 37% to $0.26 per share and beat analysts' estimates by a penny.

Image source: Getty Images.

Magnite's headline numbers look solid, but its stock price remains nearly 80% below its all-time high of $61.80 -- which it briefly hit during the Reddit-fueled rally in "meme stocks" last February. Should investors consider buying this oft-overlooked adtech stock before it recovers?

How rapidly is Magnite growing?

Magnite was created by the merger of two smaller adtech companies, The Rubicon Project and Telaria, in April 2020. In 2021, Magnite expanded its connected TV (CTV) business by buying the video tech companies SpotX and SpringServe. By pulling all those companies together, Magnite created the world's largest independent sell-side platform (SSP) for digital ads.

SSPs help digital media owners manage and sell their own ad inventories. They sit on the opposite end of the ad supply chain from demand-side platforms (DSP), which help ad agencies, advertisers, and trade desks bid on programmatic ad inventories. For reference, The Trade Desk is currently the world's largest independent DSP.

Magnite's aggressive acquisitions boosted its reported revenue, but its organic growth rates are actually much lower. It also started to report its revenue on an ex-TAC basis after its acquisition of SpotX last April -- which made the year-over-year comparisons even more confusing.

Investors should focus on Magnite's pro forma ex-TAC revenue -- which has decelerated over the past two quarters -- as a measure of its organic growth:

Data source: Magnite. YOY = year over year. *Ex-TAC basis.

Magnite generates its ex-TAC revenue from three main divisions: Connected TV (CTV), desktop, and mobile ads. The most closely watched division is the CTV business, which drives Magnite's entire long-term growth strategy.

Magnite's CTV business grew rapidly in the first half of 2021, but the ongoing supply chain disruptions throttled its ad sales to automakers and other affected sectors in the second half of the year. Roku, another major player in the CTV advertising market, also recently blamed its fourth-quarter revenue miss on the same headwinds.

Data source: Magnite. 

Its long-term targets remain intact

For 2022, Magnite expects its ex-TAC revenue to grow at least 20% to over $500 million. It also reiterated its investor day targets of growing its annual ex-TAC revenue by an average rate of 25% over the long term with an adjusted EBITDA margin (relative to its ex-TAC revenue) of 35% to 40%.

That confident forecast suggests that Magnite's CTV business will recover as the supply chain headwinds fade away. Afterward, the slow death of linear TV platforms and the ongoing growth of streaming video services should generate additional long-term tailwinds for the business.

If Magnite can achieve those goals, then its stock is a bargain today at just 3.5 times its minimum ex-TAC revenue and 10 times its adjusted EBITDA for 2022. By comparison, The Trade Desk trades at 25 times this year's projected sales and 67 times this year's adjusted EBITDA.

Why I'm optimistic about Magnite's future

Many investors seemed to avoid Magnite because its financial reports were confusing and its organic growth rates were uneven. The supply chain headwinds for the CTV market and the ongoing platform-related challenges for mobile and desktop ads made it even less appealing.

However, I believe Magnite's organic growth will improve significantly this year as it overcomes all these near-term challenges. When investors finally notice that turnaround, its stock could command much higher valuations.