What happened
Shares of advertising-technology company Magnite (MGNI 1.36%) jumped 13.9% in May, according to data provided by S&P Global Market Intelligence. The stock moved little following the release of financial results for the first quarter of 2022 early in the month. The results are difficult to wade through. Therefore, Magnite stock rose and fell as its peers in the space gave conflicting thoughts on the state of the industry.
So what
Between traffic acquisition costs and pro forma operating results, Magnite's quarterly reports are among the most difficult to decipher. It's the largest, independent supply-side ad-tech company, meaning it helps publishers sell their ad space. It's not uncommon for companies like this to make adjustments to revenue because some of it basically just passes through. This adjustment excludes traffic-acquisition costs and is referred to as "revenue ex-TAC."
Magnite management issued guidance for revenue ex-TAC of $105 million to $109 million. And it met this guidance by delivering Q1 revenue ex-TAC of $107.1 million, up 79% year over year.
Image source: Getty Images.
The growth rate sounds good. But Magnite has been very acquisitive in recent years. And Q1 revenue was aided by recent acquisitions of SpotX and SpringServe. These acquisitions were strategic because of their presence in connected TV (CTV) -- a market that Magnite wants to dominate. And Magnite's CTV revenue ex-TAC was 39% of total revenue and up 253% year over year -- promising growth.
But again, last year's results didn't include results from SpotX and SpringServe. This year's results did. Therefore, if you pretend that SpotX and SpringServe were part of Magnite last year, these are called pro forma results, and they help to show the organic growth rate.
Organic growth results were less encouraging. Magnite's pro forma revenue ex-TAC was only up 15% year over year in Q1. And pro forma CTV revenue ex-TAC was only up 27%.
With results this confusing, it's no wonder that Magnite stock was little changed with its Q1 report and continues to receive little coverage from Wall Street analysts.
Now what
For regular investors, I think a tangible takeaway is that Magnite generates revenue from advertising. Therefore, the health of the ad industry is important. And in May, investors got some conflicting information. Snap stock plunged when it said the market was deteriorating. But many ad stocks -- including Magnite -- bounced back a couple of days later when Magnite's partner The Trade Desk said business was fine.
To be clear, during recessions, consumers have less discretionary income. And when they cut back, advertisers tend to cut back too. So it's possible 2022 will be a difficult year for Magnite, and its own full-year revenue guidance reflects this. It's calling for revenue ex-TAC of "at least" $500 million, which would only be an increase of about 20% from 2021.
That said, Magnite's management expects to generate at least $100 million in free cash flow (FCF) this year. Therefore, trading at just 14 times expected FCF, Magnite investors are being rewarded for this uncertainty with a cheap valuation.
