The opportunity in the digital advertising industry is enormous. Some estimates put the amount of digital ad spending by 2024 at $627 billion. This will get split across multiple publishing platforms, but there are advertising technology (adtech) companies that will facilitate nearly all of these transactions.
Sell-side adtech players help publishers fill available ad inventory, so these sell-side companies could capture the vast opportunity ahead. PubMatic (PUBM -2.27%) and Magnite (MGNI -3.30%) are the two top dogs on the sell side, but which one looks better positioned to benefit the most over the next five years?
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The case for Magnite
PubMatic and Magnite are both leaders in this space, but the latter is the largest in terms of revenue. Magnite's top line is roughly double that of PubMatic, possibly signaling that the company has been the primary beneficiary of the shift to digital advertising.
Magnite is also a serial acquirer. The sell side is a very fragmented market; some investors believe this could change as consolidations and acquisitions in the sector increase. Magnite has gotten ahead of the game and started acquiring businesses quickly. It spent a lot of cash with the purchases of SpotX in April 2021 and SpringServe in July 2021. Last year, the company spent almost $662 million in net cash on purchasing other businesses.
While this might benefit Magnite, it has also been a noticeable hindrance to the company's financials. If you include acquisition costs in the company's free cash flow, it burned over $564 million in free cash flow last year. That's more than the $468 million the company generated in revenue over the same period.
And Magnite might be acquiring these businesses because of its weak organic growth. In the second quarter of 2022, the company's pro forma revenue expansion was just 7% compared to the year-ago period. Therefore, while acquisitions supplement its leadership, they potentially signal weakness in its core business, which investors should be aware of.
The case for PubMatic
It might not be the top dog, but PubMatic does have a solid chunk of the adtech industry under its control. As of the end of 2021, PubMatic had roughly 3% to 4% market share.
There's also reason to believe this could rise over the coming years. PubMatic has increased revenue on a year-over-year basis by 20% or more for eight consecutive quarters, and it outpaced Magnite's top-line expansion in the second quarter of 2022. While Magnite saw revenue jump only 20% year over year, PubMatic saw a 27% jump in the quarter, all of which was organic (which can't be said about Magnite's revenue improvements).
PubMatic is also beating Magnite in connected TV (CTV) advertising. The company had 196 CTV publishers as of the second quarter, and it saw CTV revenue pop 150% year over year in the period. This significantly outpaced Magnite's CTV expansion of just 52% over the same period.
Lastly, PubMatic's profitability is impressive and far better than Magnite's. Over the trailing 12 months, PubMatic generated over $54 million in net income, which is much more appealing than Magnite's $94 million loss over the same period, despite having double the revenue base.
More importantly, this high profitability is sustainable for PubMatic because it owns its own tech infrastructure. Whereas many companies like Magnite have to pay third parties to store and analyze data, PubMatic has those capabilities internally, and it costs the company very little to maintain this infrastructure.
The better stock?
With its sustainable advantage resulting in higher profitability and more attractive organic (and overall) growth rates, PubMatic is the more attractive pick today. Not to mention the valuation disparity: PubMatic trades at just 18 times earnings, while Magnite trades at 897 times.
While both companies could benefit from the rise in digital advertising over the coming years, PubMatic seems much better positioned to capitalize on it and benefit shareholders. Therefore, shying away from Magnite and instead investing in PubMatic seems like the better choice for long-term investors today.
