What happened
Ad technology specialist Magnite (MGNI 0.70%) underperformed a declining market this week. Shares were down 19% through early afternoon trading on Friday compared to a 2.9% slump in the S&P 500, according to data provided by S&P Global Market Intelligence. Yet Magnite's stock is still running ahead of the market so far in 2023.
This week's slump came after the company updated shareholders on its Q4 earnings results on Wednesday afternoon.
So what
Growth wasn't the problem. In fact, Magnite beat expectations for the period as revenue rose 9% to $175 million. Engagement was especially strong around streaming video advertising, which is a major growth target for the company. "We delivered a strong fourth quarter," CEO Michael Barrett said in a press release.
Investors apparently chose instead to focus on a few weak spots in the earnings update. Magnite reported a $36 million loss for the period compared to a $500,000 gain a year earlier. Executives said in a conference call that new pressures arrived from a weakening ad spending environment that has continued into early 2023. And management said a meaningful improvement in profitability likely wouldn't arrive until the second half of 2023, with help from cost cuts including layoffs that Magnite announced in January.
Now what
Patient investors shouldn't have any trouble waiting until late 2023 to see a turnaround in Magnite's profitability. And the company's current positive cash flow could ease potential concerns about a cash crunch in the event of a recession.
Still, investors can expect this small-cap stock to continue making big negative swings during periods of elevated market turmoil like this. Its relatively tiny sales footprint and high debt level leave Magnite exposed to fears about a downturn in the digital advertising market. The company has over $700 million of debt on its books, compared to its market capitalization of below $2 billion, giving it less financial flexibility in the event of a recession.
If you don't mind the volatility and can be patient as the company works toward a profit margin rebound in late 2023, then you might consider adding this stock to your watch list.
