Magnite: Huge Upside Potential In Connected TV
Magnite (Nasdaq: MGNI) is a relatively small company with enormous opportunities for growth in programmatic advertising over the years ahead. The company is facing considerable challenges, and a position in Magnite is inherently risky. Nevertheless, the upside potential may be well worth it.
Solid Performance In A Challenging Period
Magnite is the largest independent sell-side omnichannel advertising platform in the world. The company is the result of a merger between Rubicon Project and Telaria; this merger is quite recent, as it was completed in April of 2020.
Rubicon brings a large presence as a scaled programmatic exchange to the table, while Telaria provides leading connected TV (CTV) capabilities, so the merger makes a lot of sense from a business perspective.
Scale and presence are key sources of competitive strength in the sector, and Magnite is very well positioned in that regard. The company has access to over 2,000 publishers in 50 countries, with over 150 billion daily impressions and more than 600 employees globally.
On the other hand, things are not easy for Magnite nowadays. Advertising is a very cyclical industry, so the recession is a major setback for the whole sector. Besides, implementing such a merger in times of work from home and rampant uncertainty can be a colossal challenge.
But Magnite still delivered better-than-expected numbers for the second quarter of 2020. Reported revenue increased 12% year over year to $42.3 million, the number surpassed analysts' expectations by $4.7 million.
Even more important, management highlighted some very positive trends in revenue during the quarter.
Since our last earnings call, we have observed a steadily improving revenue recovery. We noted in our last earnings call that we had observed revenue stabilizing in April and early May at a level of roughly down 30% year-over-year on a pro forma basis. Revenue in May and June continued to recover, with June down only 17% year-over-year on a pro forma basis, resulting in a 24% year-over-year decline for the full quarter. Since the start of this quarter, we have observed even greater recovery, with Q3 revenue quarter-to-date nearly breakeven year-over-year on a pro forma basis. And since the start of Q3, we have observed even more rapid acceleration in CTV revenue growth, currently running at roughly 50% up year-over-year
The company also measured ad spend trends in U.S. regions that were impacted by a resurgence in coronavirus. Those regions initially showed a slowdown in April and May, and numbers started to recover in the following months. With the new hotspots in July, Magnite detected no corresponding slowdown in spending in these areas, and demand even continued to grow in these regions.
A Massive Opportunity In CTV
CTV is arguably the most promising driver for investors in Magnite over the years ahead. Management said in the conference call that CTV revenue was growing at over 50% year over year recently, which provides validation to the bullish thesis in the stock.
According to estimates from ARK, OTT ad revenues are expected to increase 7x in the next five years, from nearly $6 billion in 2019 to $44 billion in 2024. Magnite is expected to generate only $202 million in revenue this year, so even grabbing a very small share of this opportunity could be a powerful driver for the company.
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Source: ARK Invest
Management is seeing an acceleration in the CTV market recently, with the largest industry participants such as Hulu, Disney (NYSE: DIS), Roku (Nasdaq: ROKU), Peacock, Sling, and Pluto benefitting from strong subscriber growth, increased consumer viewing time, and solid ad spend growth.
There is also a significant increase in CTV ad inventory. This is driven by both short-term factors and long-term drivers. In the short term, consumers are watching more CTV during the pandemic. From a secular perspective, consumers are cord-cutting and canceling satellite subscriptions while they turn their attention to CTV. Advertising dollars are obviously going in the same direction as consumers' eyeballs over the long term, with or without a recession.
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Source: Magnite
The CTV revolution was well in place before the pandemic, and the trend seems to be accelerating recently. Advertising is obviously affected by the economic slowdown, but the recent data from Magnite is indicating that the prospects for a recovery in the middle term look quite promising.
Risk And Reward Going Forward
The risks that come with a position in Magnite are undeniably high. Mergers always carry lots of challenges, and especially more during a global pandemic and a recession. The numbers from Magnite are quite strong considering the circumstances, but economic uncertainty will probably weigh on the stock in the short term.
Management is expecting to be profitable at the EBITDA level next quarter, but this still remains to be seen. Even assuming that the company can start producing positive EBITDA numbers in the near term, there can be a long path towards full profitability. Sell-side companies have traditionally struggled with profitability, and while the profitability prospects in CTV are much stronger, it is hard to know how industry dynamics will evolve going forward.
Magnite also competes against giants such as Amazon (AMZN). Magnite's big advantage over Amazon is being independent, while Amazon is also a content creator, which can produce some conflicts of interest. Nevertheless, the competitive risk is an important factor to watch going forward.
But the upside potential in Magnite stock could be worth the risks over the long term. The company has a market capitalization value of $830 million, and it operates in an industry with massive potential for growth, so it has a lot of room for revalorization going forward.
Magnite stock is currently trading at a price-to-sales ratio of 3.4 times revenue estimates for 2021, and revenues are expected to increase by 19% in 2021 versus 2020. If the bullish thesis plays out well, Magnite could offer huge gains from current valuation levels.
Disclosure: I am/we are long MGNI, AMZN.
Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship ...
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