The stocks for The Trade Desk (TTD 3.35%) and Magnite (MGNI 2.94%) were both crushed this year as inflation, recessionary fears, and other macro headwinds drove investors away from ad tech stocks.
The Trade Desk shed nearly 40% of its value this year, while Magnite fared worse with a decline of more than 60%. Should investors buy either of these unloved advertising stocks as a contrarian play?
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How The Trade Desk and Magnite differ from Google
The Trade Desk is the world's largest independent demand-side platform (DSP) for digital ads. Magnite sits at the opposite end of that supply chain as the world's largest independent sell-side platform (SSP). DSPs enable ad agencies, advertisers, and trade desks to bid on ads. SSPs help publishers manage and sell their own ad inventories.
Alphabet's (GOOG 0.74%) (GOOGL 0.55%) Google houses a DSP, SSP, and various other advertising services. However, many companies -- especially those that directly compete against Google in streaming media, cloud-based services, and other markets -- are often reluctant to lock themselves into Google's walled garden of ad services.
That reluctance has created a booming market for independent DSPs and SSPs like The Trade Desk and Magnite. Both companies serve desktop and mobile ads, but they both consider connected TV (CTV) ads to be their highest-growth market.
How The Trade Desk and Magnite differ from each other
As a DSP, The Trade Desk didn't initially compete against Magnite and other SSPs. Instead, it needed to work with an SSP like Magnite to access a publisher's ad inventories.
But earlier this year, it rolled out a new feature called OpenPath that bypasses SSPs and directly connects publishers to advertisers. Major publishers -- including Reuters, The Washington Post, Gannett, and Condé Nast -- have already adopted that feature. This secular shift could hurt Magnite, Google's Ad Manager, and other SSPs. Magnite doesn't believe OpenPath represents an existential threat to its business yet, but I think it's still too early to make that call.
The Trade Desk hasn't made any major acquisitions since its purchase of Adbrain nearly five years ago. Therefore, its organic growth is much easier to track than Magnite's messy record of mergers and acquisitions (M&A). Magnite was created by the merger of two smaller SSPs, The Rubicon Project and Telaria, in 2020. It subsequently acquired SpotX and SpringServe to expand its CTV advertising ecosystem, then bought Carbon to add more publisher monetization tools to its platform.
As a result, Magnite primarily reports its growth in pro forma terms, which smooth out the lumpy inorganic growth rates from its acquisitions, and on an ex-TAC basis, which excludes SpotX's traffic acquisition costs (TAC).
Which company is growing faster?
The Trade Desk's revenue rose 43% to $1.2 billion in 2021, accelerating from its 26% growth in 2020 as the pandemic-related headwinds faded and the CTV market grew. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 77% to $503 million during the year, and its adjusted EBITDA margin expanded from 34% to 42%.
Analysts expect The Trade Desk's revenue to rise 33% to $1.6 billion this year and for its adjusted EBITDA to increase 25% to $628 million, while its adjusted EBITDA margin could dip slightly to 40%. It doesn't expect many near-term challenges: It only generates a single-digit percentage of its revenue in Europe, which limits its exposure to the Russia-Ukraine war, and it expects the U.S. midterm elections to generate tailwinds for its business throughout the second half of 2022.
Magnite's revenue ex-TAC rose 90% to $417 million in 2021. But on a pro forma basis, its revenue decelerated significantly in the second half of the year as the growth of its CTV business cooled off. It mainly blamed that slowdown on supply chain disruptions, which caused certain sectors (especially automakers) to curb their ad spending. Its adjusted EBITDA surged 245% to $149 million, which boosted its adjusted EBITDA (ex-TAC) margin from 20% to 36%.
Magnite expects its ex-TAC revenue to be "well over" $500 million in 2022, which implies its top line will grow by at least 20%. It also reiterated its long-term goal, which it set last September, of eventually growing its annual revenue by at least 25% organically. Analysts expect Magnite's ex-TAC revenue to rise 23% to $514 million for the full year as its adjusted EBITDA increases 14% to $170 million. That forecast implies its adjusted EBITDA margin will decline slightly to 33% -- compared with the long-term target of 35% to 40% that it set last September -- as it works through the macro challenges.
Which stock is the better value?
The Trade Desk is growing faster than Magnite, it wasn't affected by the supply chain issues that plagued Magnite over the past year, it isn't heavily dependent on M&A, and it's operating at higher adjusted EBITDA margins. Those strengths seem to make The Trade Desk a better buy than Magnite, but it also isn't cheap at 18 times this year's sales and 45 times its adjusted EBITDA. Meanwhile, Magnite looks dirt cheap at less than two times this year's sales and five times its adjusted EBITDA.
In a bull market, I'd heartily recommend buying The Trade Desk over Magnite. But in a bear market, Magnite's bargain bin valuations arguably make it a more compelling buy as rising rates drive investors toward value stocks.
