Investment thesis

Magnite (MGNI) is a rebranded ad tech company, formerly known as Rubicon Project, after merging with Telaria in April 2020. The combined entity forms the largest independent sell-side/supply-side advertising platform.

We thought the move makes sense. If the integration is successful, the new company benefits from Rubicon’s scaled programmatic exchange and also Telaria’s exposure to connected TV advertising.

Magnite’s clients include Hulu TV, SlingTV, and Pluto TV, among others. The company helps these brands by maximizing advertising revenue through an omnichannel platform from audio, desktop, mobile, TV and connected TV.

However, since the merger, the combined company’s market value dropped, and since March has traded sideways.

Source: Yahoo Finance

We think there is an opportunity for a rewarding investment here as the company is making a turn from the worst of COVID-19, the balance sheet is strong and should benefit from the inevitable transition to Connected TV.

Recent financials

Magnite financials

Source

Magnite delivered a good quarter that points to a turnaround in the industry, particularly CTV. Total revenue grew 12% YoY, driven by CTV, which now represents 19%.

Magnite revenue split

Source

The management guides Q3 to grow sequentially to $53M in the mid-range, or around 25%. Again, connected TV is driving the improvement. Since July, the segment reports a 50% increase vs. prior year. This also means that CTV will represent a more significant share of the total revenue going forward, reflecting the favorable trend in CTV.

As a result, the company expects Adjusted EBITDA to be positive in Q3. And the CEO, Michael G. Barrett, is optimistic of what is to come:

Going to market as the leading independent omnichannel supply-side platform, newly branded as Magnite, puts us in a strong position to best serve buyer and publisher needs. We are seeing a number of positive drivers including sustained recovery in brand spending, supply path optimization share gains, a return of live sports, a pickup in political spending in CTV specifically, and spend re-allocation due to social advertising boycotts.”

He highlighted the reopening of sports events and political spending as two of the main drivers.

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Risks and valuation

Despite the positive signs in Q2 and part of Q3, it remains a question if the combined entity will be able to merge successfully. The management pointed to a $20M run rate of synergy; however, we are skeptical.

Particularly, Magnite’s gross margin has little room to improve. It has been compressing steadily to 62% from 83% over the past five years. Meanwhile, the company still spends 60% of sales on SG&A. Thus, it’s not clear that the company can scale successfully.

Additionally, the advertising industry remains uncertain, and a prolonged second wave could derail Magnite’s progress.

Nevertheless, the company has a large cushion of $107M in cash (no debts) to weather the storm. It is also priced reasonably at 4.4x EV/Sales. This trades favorably compared to The Trade Desk (TTD) at 33x and Roku (ROKU) at 16x. Both are not directly comparable but share substantial exposure to the connected TV space.

Summary

Magnite is the leader in the supply-side advertising platform. It has a growing exposure in CTV and is seeing better days from Q2’2020. As the economy recovers, the stock is a good recovery bet. Lastly, the valuation is also not hyperbole compared to other names.

However, it is a riskier investment as uncertainties remain around the industry. Additionally, given the gross profit profile and how high marketing expenditures have been, it’s not certain if the company can scale up sustainably.

Disclosure: I am/we are long MGNI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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