Magnite (MGNI 2.94%) stock has dropped significantly over the past year as investors' concerns about its customers' ad budgets shrinking have come to fruition. Companies in the auto, electronics, and consumer products industries have pulled back on their ad spending over the last year, which is bad for Magnite's ad-tech business.
Despite the pullback in advertising, some positives should take hold during the second half of 2022 to bolster Magnite's business. Here are three reasons why Magnite's ad-tech business should perform well moving forward and into 2023.
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1. The mid-term elections and return of travel ad spend
Magnite's management said it believes that pent-up travel demand and the U.S. mid-term elections should help ad spending recover in the third and fourth quarters. And there is good reason to think that Magnite is correct.
According to a Mastercard Economics Institute report, flight bookings are accelerating -- possibly indicating the start of a significant travel recovery. According to Publicis Media's Zenith research, global ad spending is expected to be up 36% in 2022 and 19% in 2023. Equally important, Magnite expects politicians to spend heavily on advertising on streaming platforms leading up to the mid-term elections, with a vast majority of spending occurring in Q3 and Q4.
According to AdImpact, political ad spending will reach $8.9 billion in 2022. If true, that would represent an approximately 123% percent increase over 2018. Additionally, Magnite has data showing that 40% of persuadable voters can no longer be accessed via cable or satellite TV. As a result, Magnite expects to capture a significant chunk of increased political ad spend on streaming TV.
2. Magnite is building a next-gen platform
Until recently, publishers only had a choice between working with non-independent supply-side platforms (SSP) like Alphabet's Google or working with a large fragmented landscape of different independent specialized SSPs.
However, today publishers want to reduce the number of SSPs they work with to minimize the possibility of data breaches and fraud. Thus, the need arose for an independent one-stop-shop to replace multiple platforms specializing in only one thing. And Magnite will fulfill that need soon by merging the best of four specialized ad platforms -- The Rubicon Project, Telaria, SpotX, and Springserve -- into one next-gen platform. Magnite intends to migrate clients onto the new platform by the first quarter of 2023, with the expectation that the new platform will provide additional revenue opportunities moving forward.
3. More publishers are creating ad tiers
Disney+ was the first of the main subscription-only streaming services to announce an ad tier in March 2022. And it was not long before people began speculating about how long it would take before other important subscription services followed Disney's lead. A little over two months later, Netflix surprised the market by announcing that it would also introduce a lower-priced ad-supported tier by the end of the year -- leaving Apple's Apple TV+ as the only major streaming company that has yet to announce an advertising option.
Companies like Netflix have minimal experience with streaming ad technology and need a company like Magnite to maximize how much they can charge advertisers. So the potential for Magnite to add additional business has risen. For example, Magnite already has an existing strong relationship with Disney. And that relationship is expected to translate into Disney+ using Magnite's services -- meaning additional revenue.
The economy is still shaky
While the second half of this year has favorable tailwinds for Magnite, plenty of worries still exist.
First, issues such as the war in Ukraine have already slowed Magnite's advertising growth in Europe, and this could worsen as that war continues.
Second, according to Generally Accepted Accounting Principles, Magnite is not currently profitable and carries long-term debt of $720.71 million against only $204.58 million in cash. While Magnite is free cash flow positive, investors have punished unprofitable companies with relatively high debt over the past year. In addition, economic experts are more frequently predicting a recession -- a lousy scenario for an unprofitable company.
Last, Snap's May 23 earnings results only worsened market sentiment as investors became worried that the economy is rapidly deteriorating. Magnite's stock price, along with other ad-tech stocks, dropped in response.
The bottom line
Over the past year, this terrible market environment has taken Magnite's stock down about 70% below its 52-week highs. And although Magnite can suffer further declines from the ongoing risks of recession, supply chain disruptions, a resurgence of COVID-19, or the war in Ukraine, the stock is now trading at a price-to-sales ratio of 3.10 -- far below the P/S ratio of 21.33 Magnite was trading at around the end of March 2021. Magnite's current valuation adequately compensates long-term investors for a company that has positioned itself very well for a resurgence in the advertising market.
