Magnite's (MGNI -7.16%) stock dropped 16% on Feb. 23 after the advertising technology company posted its fourth quarter earnings report the evening before. Excluding its traffic acquisition costs (ex-TAC), its revenue rose 10% year over year to $156.6 million and exceeded analysts' estimates by $3.1 million.

Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) dipped 5% to $64.2 million, which compressed its adjusted EBITDA margin from 48% to 41%. That trickled down to an adjusted profit or $0.24 per share, which missed analysts' expectations by $0.08. On an unadjusted basis, it posted a net loss of $36.4 million, compared to a profit of $500,000 in the prior-year quarter.

Magnite's sluggish growth was disappointing, but it wasn't too surprising in this tough macroeconomic environment for advertising companies. Let's take a fresh look at the bear and bull cases to see if this stock is still worth buying.

What does Magnite do?

Magnite is the world's largest independent sell-side platform (SSP) for digital ads. It was initially created by the 2020 merger of two smaller ad tech companies, The Rubicon Project and Telaria, and subsequently expanded through the acquisitions of SpotX, SpringServe, and Carbon. SSPs help publishers manage and sell their own ad inventories. They work in tandem with demand-side platforms (DSPs) like The Trade Desk (TTD -11.48%), which sell ad space across a wide range of platforms.

What the bears will tell you about Magnite

The bears believe Magnite faces two main challenges. First, digital advertising giants like Alphabet's Google and Meta Platforms already bundle SSPs, DSPs, and other ad tools together. Magnite is the largest "independent" SSP, but it still competes against those diversified tech giants.

Second, The Trade Desk recently rolled out a new feature called OpenPath, which directly connects publishers to advertisers without an SSP. Therefore, The Trade Desk -- which is already the largest independent DSP -- could render SSPs obsolete in its quest to become a more diversified ad tech platform.

The bears will also point out that Magnite's connected TV (CTV) business, which drives most of its growth, suffered a slowdown in the fourth quarter. Its CTV ads also brought in a lower percentage of its total ex-TAC revenue as it relied more heavily on its slower-growth mobile and desktop businesses.

Metric

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

CTV Revenue Growth (YOY)

23%*

27%*

19%

29%

20%

CTV Revenue as Percentage of Total Revenue

38%

40%

42%

44%

41%

Data source: Magnite. Ex-TAC basis. *Pro forma basis adjusted for acquisitions.

During the conference call with analysts, CEO Michael Barrett said that the 20% growth of Magnite's CTV segment had "outpaced" the industry even as the "overall ad spend environment" remained weak. However, CFO David Day warned that the CTV sector would experience an "industrywide slow start" in a "challenged economic environment" in the first quarter of 2023.

As a result, Magnite expects its ex-TAC revenue to decline 4%-8% year over year. On the same basis, it expects its CTV revenue to only rise 0%-5% and account for 39% of its top line. That forecast was disappointing since The Trade Desk -- which also relies heavily on the CTV market -- expects its revenue to rise at least 15% year over year in the first quarter.

Magnite expects its adjusted EBITDA margin to drop to a midpoint of 16% in the first quarter -- compared to 27% in the first quarter of 2022 and its long-term target of 35%-40%. For the full year, analysts expect Magnite's revenue to rise 5% as its adjusted EBITDA dips 2%. Those anemic growth rates could prevent the bulls from coming back.

What the bulls will tell you about Magnite

Those near-term challenges are worrisome, but the bulls believe Magnite's growth will accelerate again as the CTV market expands and profits from the death of linear TV platforms. They also believe that a growing desire to break free from the walled gardens of Google and Meta to advertise across the "open internet" will bring more publishers to Magnite.

That's why analysts still expect Magnite's revenue and adjusted EBITDA to rise 14% and 26%, respectively, in 2024 as the macro environment improves. Investors should take those estimates with a grain of salt, but Magnite still looks cheap relative to those longer-term prospects at three times this year's sales and 11 times adjusted EBITDA. By comparison, The Trade Desk isn't cheap at 14 times this year's sales and 36 times adjusted EBITDA.

Magnite has adequate liquidity to ride out the storm. It ended the year with $326 million in cash and equivalents, and it expects to generate a positive free cash flow of about $100 million in 2023. Its low enterprise value of $1.8 billion could also make it a tempting takeover target.

Which argument makes more sense?

Magnite isn't doomed, but it will stay in the penalty box until the growth of its CTV business accelerates and its adjusted EBITDA margins stabilize. Without those improvements, it makes more sense to invest in The Trade Desk or a diversified advertising giant like Alphabet or Meta instead.