The Walt Disney Company (DIS 0.97%) recently revealed it will unveil a new tier for its popular streaming service Disney+. In addition to continuing its current paid offering, the company will introduce an ad-supported version later this year.
While investors are understandably excited about what this might mean for Disney's growth prospects, I'm more excited about what this means for a little-known company called Magnite (MGNI -1.59%).
What is Magnite?
Magnite is an advertising-technology company formed to aggressively pursue the opportunity in connected TV (CTV). You may have heard of The Trade Desk, a company that partners with advertisers. Magnite does the opposite: It partners with publishers to sell their ad slots to companies like The Trade Desk.
For this reason, Magnite is called a sell-side ad-tech company. And it's not just any ol' company -- it's the largest independent company that does what it does. To be clear, some publishers have their own technology solution. But Magnite is independent, meaning it's not a publisher. It's a pure ad-tech play.
Being the biggest company has its perks. Major CTV publishers need technology partners with scale, and Magnite has it. Therefore, it's not surprising to see that Magnite has already won the business of big fish like Discovery, Roku, and fuboTV.
More than these, Magnite already has an established relationship with Disney. To close out 2020, the two parties signed an 18-month contract for Magnite to sell Disney's ad slots across their various platforms, including Hulu, ESPN, and ABC. That contract is set to expire this year. Assuming Magnite has continued to do a good job for Disney, I would expect the two to sign a new contract soon. But this time, the deal would likely include the lucrative Disney+ platform.
Image source: Getty Images.
Why Magnite is a good stock to buy
According to eMarketer, CTV ad spending in the U.S. grew almost 60% in 2021 to $14.4 billion. Two of the top three publishers are Roku and Hulu -- both Magnite customers, meaning Magnite is a big beneficiary of CTV growth to date. Excluding traffic acquisition costs (TAC), which is essentially pass-through revenue, Magnite's full-year 2021 revenue was up 90% year over year. Some of this is due to acquisitions. But there's certainly some organic growth here as well, considering the customer base.
CTV is expected to remain a hot-growth space for years to come. Growth should come from a variety of sources, including companies like Disney converting subscription streaming services to ad-supported channels. Considering Disney+ has a whopping 130 million paid subscribers, it's likely that ad-supported Disney+ alone will be a big boost for the space as a whole.
More than this, if Disney is considering an ad strategy for its paid service, then it's safe to assume all publishers are reevaluating their ad strategies. One example is Netflix. The company is currently trying to get to 500 million paid subscribers and has been against running ads. However, in a recent interview, its chief financial officer seemed to be warming to the idea by saying, regarding ads, "Never say never."
As more publishers like Disney and Netflix consider running ad-supported CTV channels, the market opportunity grows for companies like Magnite.
That's the tailwind filling Magnite's sails. But another reason to like Magnite stock is it's a financially strong company right now. Unlike many other small-cap tech stocks, Magnite is cash-flow positive, generating $127 million in cash from operations in 2021 on just $468 million in revenue.
With a market capitalization of just $1.8 billion, Magnite trades for roughly 14 times its operating cash flow, which is cheaper than many other companies, including Disney, which trades at 49 times its cash from operations. The two companies are obviously very different. However, I'd rank Magnite's long-term growth prospects greater than those of more mature Disney, which makes Magnite's cheaper valuation all the more attractive to me.
This isn't to say there's nothing to worry about with Magnite -- there is. Magnite has pursued the growth-by-acquisition strategy the last couple of years, which is an intrinsically tricky strategy to pull off. To truly be valuable for shareholders, all of these acquisitions need to amount to more than the sum of their parts. And only time will tell if that's the case here.
Related to acquisitions, Magnite's balance sheet isn't the greatest as it's needed to use financing arrangements to fund its purchases. It has just $231 million in cash compared to almost $500 million in acquisition-related liabilities right now.
All of this said, Magnite's business is fundamentally sound, and it should be able to meet all of its obligations with ease. And given the boost it might get from Disney very soon, this is an under-the-radar stock for investors to consider today.
