Magnite (MGNI +1.00%) was created from the merger of two ad tech companies, Rubicon Project and Telaria, in April 2020. On its first day as a combined company, Magnite's stock opened at $5.47 per share.
But last February, its stock skyrocketed to an all-time high of $61.80 during the Reddit-fueled rally in meme and growth stocks. Today, its stock trades at about $10 a share. That wild ride made Magnite seem dangerously volatile, but could it stabilize and head higher over the next five years?
Image source: Getty Images.
What does Magnite do?
Magnite's initial merger made it the world's largest independent sell-side platform (SSP) for digital ads. SSPs help publishers and digital media owners manage and sell their own ad inventories. They sit at the opposite end of the ad supply chain from demand-side platforms (DSPs) like The Trade Desk (TTD 6.43%), which enable trade desks, ad agencies, and advertisers to bid on ad inventories and manage their ad campaigns.
Magnite generates most of its revenue from the desktop and mobile advertising markets. However, most of its growth comes from the connected TV (CTV) market, which profits from the secular growth of ad-supported streaming video services and the death of linear TV platforms.
After its initial merger, Magnite subsequently acquired two additional companies -- SpotX and SpringServe -- to further expand its CTV business. It also bought Carbon earlier this year to gain more publisher monetization tools.
NASDAQ: MGNI
Key Data Points
How fast has Magnite been growing?
Magnite's creation and its inorganic expansion created a gap between its reported and pro forma revenues, which normalize the year-over-year comparisons for its acquisitions. Magnite also gauges its underlying growth by excluding its traffic acquisition costs (ex-TAC) from its revenue.
So to measure Magnite's actual growth rates, investors should look at its "pro forma ex-TAC" revenue instead of its reported GAAP (generally accepted accounting principles) numbers. Here's how it fared over the past year:
|
Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Reported revenue |
67% |
139% |
116% |
97% |
94% |
|
Pro forma revenue |
18% |
79%* |
26%* |
10%* |
15%* |
Data source: Magnite. YOY = Year over year. *Ex-TAC basis.
Magnite generated 34% of its ex-TAC revenue from its CTV business in 2021. Another 39% came from its mobile ads, and the remaining 27% came from its desktop ads. However, the growth of Magnite's CTV business cooled off over the past two quarters as supply chain challenges and other macro headwinds disrupted ad purchases from certain sectors.
|
Metric |
Q1 2021 |
Q2 2021* |
Q3 2021* |
Q4 2021* |
Q1 2022* |
|---|---|---|---|---|---|
|
CTV revenue growth (YOY) |
32% |
108% |
51% |
23% |
27% |
|
Percentage of total revenue |
20% |
34% |
38% |
38% |
40% |
Source: Magnite. All growth rates are pro forma. *Ex-TAC basis.
That slowdown spooked investors since the bulls had considered Magnite to be a promising long-term play on the CTV advertising market.
Where will Magnite be in five years?
Last September, Magnite set some ambitious long-term targets during an investor day presentation. It claimed that over the next few years, it could generate more than 25% annual revenue growth organically while maintaining an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 35% to 40% -- compared with its adjusted EBITDA margins of 20% in 2020 and 36% in 2021.
Over the next "five-plus" years, Magnite believes it will process $15 billion to $20 billion in ad spending annually, compared with "several billion" dollars today. Furthermore, it expects the entire CTV advertising market to grow more than fivefold by the end of that period, and for its slice of that expanding pie to grow from about 20% to 25% in 2021 to more than 30%.
For now, analysts' expectations for the next three years are slightly less bullish than Magnite's rosy long-term projections. However, they also indicate its adjusted EBITDA margin will remain within its target range of 35% to 40%.
|
Estimated Growth (YOY) |
2022 |
2023 |
2024 |
|---|---|---|---|
|
Revenue |
28% |
20% |
17% |
|
Adjusted EBITDA |
26% |
21% |
22% |
Data source: S&P Global.
We should take all those estimates with a grain of salt since ad spending will inevitably slow down if a new recession starts. But at $10 a share, Magnite currently trades at a mere seven times this year's adjusted EBITDA.
By comparison, The Trade Desk -- which is expected to grow its revenue and adjusted EBITDA by 33% and 22%, respectively, this year -- trades at 36 times that adjusted EBITDA estimate. Therefore, we could easily argue that Magnite deserves to trade at a much higher valuation.
If Magnite's adjusted EBITDA matches analysts' expectations by 2024 and its stock trades at a more reasonable valuation of 14 times its forward adjusted EBITDA, its stock price could roughly triple to about $30 a share. If it maintains that same valuation and continues to grow its adjusted EBITDA by 20% over the following two years, its share price could easily hit the low $40s.
I'm still staying bullish on Magnite
Magnite has underperformed The Trade Desk over the past year, but I believe it can bounce back in the future as the CTV market stabilizes again. Therefore, I believe Magnite remains a lucrative investment for investors who believe in the long-term growth potential of ad-supported streaming media platforms.
