Investors considering Magnite (MGNI 4.43%) stock might be motivated to buy after seeing its record 2021 full-year earnings report released in February. The advertising tech company boasted 111% revenue growth, reaching $468.4 million.
The company's excellent performance combined with the broader decline in tech stocks over recent months make Magnite shares compelling. The stock trades well below its 52-week high of $53.48.
The question is whether Magnite has what it takes to make it a good long-term investment. On the surface, the company's triple-digit 2021 revenue growth is impressive. But Magnite's acquisition of video advertising firm SpotX in April 2021 contributed significantly to that growth rate which could mean trouble in trying to repeat such a feat a year from now.
Image source: Getty Images.
When taken on a pro forma basis, which adjusts for Magnite's acquisitions, 2021 year-over-year revenue actually rose 30%. In addition, the digital advertising industry is undergoing massive disruption due to rising consumer privacy protections.
By digging into the company, and how it's addressing industry change, investors can understand better whether Magnite is a worthwhile investment.
Magnite's strategy shift
While Magnite's 2021 revenue growth was helped by acquisitions, those investments were part of the company's long-term strategy to focus on connected television (CTV) advertising. CTV is among the digital ad industry's fastest-growing areas thanks to cord-cutting.
Magnite recognized the rapid rise of CTV advertising even before the coronavirus pandemic boosted streaming adoption, quickly assembling the technology needed to capture the opportunity. In 2019, Magnite generated zero income from CTV. By the end of last year, CTV comprised 40% of the company's revenue.
Magnite achieved this rapid CTV revenue growth by first merging with Telaria, a provider of CTV technology, in 2020. This was followed last year by the acquisition of SpotX and of SpringServe, a company providing CTV ad serving. Magnite's CTV capabilities continue to expand. This February, the company introduced the ability to automatically optimize CTV advertising for live streams.
Magnite's CTV shift positions it to benefit from industry growth. An estimated $13.4 billion was spent on CTV advertising last year, and that number is forecasted to reach $24.8 billion in 2024. But the tailwind provided by CTV is coupled with headwinds from another industry change: Targeting ads to consumers.
Adapting to industry change
Advertisers gravitate to digital advertising partly due to the excellent ability to target ads to prospective customers. But that targeting ability is eroding as consumer demand for greater privacy increases.
Last April, Apple implemented privacy changes so important to ad targeting that it adversely affected the revenue of companies such as Facebook's Meta Platforms. Next year, Alphabet's Google plans substantial privacy changes that will hurt current ad targeting capabilities.
These privacy-related actions contributed to Magnite's stock price decline last year, even though Apple's privacy restrictions had little effect on Magnite's revenue since the changes didn't affect CTV. In fact, Magnite is in a position to benefit from the privacy changes. To know why it's important to understand Magnite's role in the digital advertising ecosystem.
Magnite enables the efficient buying and selling of digital advertising space on websites, mobile apps, and connected televisions for a fee. Since Magnite primarily helps the sellers of ad space (called publishers) to generate advertising revenue, Magnite's technology is referred to as a sell-side platform (SSP).
Its publisher relationships give Magnite access to customer data owned by these publishers. With this data, Magnite is working to create proprietary ad targeting capabilities that replace the technology disappearing due to Apple's and Google's privacy changes. This puts Magnite in a position to capture greater revenue as advertisers move away from current ad targeting technology.
To buy or not to buy Magnite stock
Magnite's prescient moves into CTV have played out well so far. Even so, Magnite is far from perfect. The company eked out net income of only $65,000 in 2021, and it has operated at a net loss for years, which is common for many tech companies.
Its acquisitions also resulted in exiting 2021 with over $700 million in debt compared to no debt the year prior. The company is working to reduce its net debt-to-EBITDA ratio down to 2 times from about 3 times at the end of 2021.
But Magnite's balance sheet is solid, standing at $2.7 billion in total assets compared to $1.8 billion in total liabilities. The company also authorized a share repurchase program.
Moreover, Magnite has digital advertising industry growth as a tailwind. In the U.S. alone, where Magnite generated 78% of its 2021 revenue, digital ad spending is forecasted to increase from $211.2 billion last year to $315.3 billion by 2025.
With CTV and overall digital ad spending expanding over the next few years, and Magnite's SSP role positioning it to prosper amid ad targeting changes, the company's advantages outweigh the cons. These factors make Magnite a worthwhile investment over the long run.
