MGNI - Magnite: Adapting To Uncertain Terrain Why I'm Neutral

2023-10-18 16:15:22 ET

Summary

• Magnite, Inc.'s future seems uncertain due to its highly leveraged balance sheet.
• Challenges in the CTV sector, like a shift in the advertising landscape, worry me.
• I share analysts' skepticism about Magnite's 2024 prospects.

Investment Thesis

Magnite, Inc. ( MGNI ) is a supply-side platform serving the adtech space. In plain English, this means Magnite helps other companies buy and sell digital advertisements more easily. They connect brands and agencies that want to put ads online with the people who have space for those ads.

Magnite has seen its share price dramatically sell off post Q2 earnings results in August. And indeed, MGNI stock is far from richly priced. It appears that Magnite is priced at about 10x to 11x next year's EPS, which is far from a high valuation.

However, I am not persuaded that Magnite is priced at a discount, either. As a result, my opinion on this stock remains neutral.

Magnite's Near-Term Prospects

Magnite is a technology provider in the digital advertising industry. Their focus is on streamlining the buying and selling of digital advertising inventory across various digital channels.

At their core, their platform supports bidding automation. Thus working as an intermediary between publishers, advertisers, agencies, and demand-side platforms.

Following a series of strategic mergers and acquisitions, MGNI has solidified its position as the world's largest independent sell-side advertising platform, boasting an extensive network of buyers and sellers. These acquisitions haven't been cheap and have ended up with its leveraged balance sheet (more on this later).

Notably, Magnite's unified CTV platform, Magnite Streaming, caters to the specific demands of the Connected Television (''CTV'') market.

Accordingly, the bull case argues that Magnite is able to leverage its scale to provide a comprehensive suite of services for sellers to maximize their advertising yield and for buyers to reach their target audiences effectively.

Consequently, the argument that is made is that Magnite is poised to capitalize on the convergence of CTV and digital mediums , therefore catering to the increasing demand for advanced identity solutions, in a cookie-free environment, leading to supply path optimization in the adtech industry.

That being said, Magnite has encountered near-term challenges. For instance, these headwinds seem to stem from shifts in the advertising landscape, particularly in the CTV sector.

Moreover, Magnite is facing a significant share shift in its CTV platform, with larger players like broadcasters and TV OEMs taking a more direct approach to selling premium inventory through programmatic transactions, all playing into the hands of the biggest independent demand side platform, The Trade Desk ( TTD ).

This change has led to a concentration of spending by specific publishers. Why is this a problem for investors? Because Magnite's story was previously tied up to its CTV prospects. For a long time, investors have recognized that Magnite's desktop business was struggling, and the only aspect that investors had to latch onto had been Magnite's CTV prospects.

Hence, we reach the crux of the matter. If Magnite's Q3 results turn out to be yet another quarter where Magnite's CTV revenue growth rates don't live up to investors' expectations, I believe that investors will not look too kindly to those negative sets of results.

What Will Magnite's 2024 Look Like?

In the best-case scenario, Magnite's CTV revenues will end up flat y/y in Q3 2023 (currently scheduled to be released November 8th). That would be better than what investors have been guided towards by Magnite, but even so, I'm not convinced that seeing flat y/y CTV revenues will be enough for investors to give Magnite a pass in these quarterly earnings.

What investors want, above all, is certainty . They want to know that Magnite's 2023 revenue growth rates are as bad as it's going to get, and that 2024 will see Magnite's revenue growth rates improving.

However, as it stands right now, it's not only me that's doubtful that Magnite's revenue growth rates will not improve. It appears that analysts following Magnite are also skeptical of its 2024 prospects.

Magnite's Balance Sheet. It Didn't Matter. But Now It Does

This leads me to my final point. Magnite's balance sheet was never an issue before. Even though its balance sheet was a lot more leveraged.

But that was in a period of low-interest rates, which overlapped with Magnite delivering solid topline growth rates. And now?

These two aspects have turned diametrically the opposite. Interest rates are high and Magnite's revenue growth rates are low.

The Bottom Line

Challenges in the CTV sector, including a shift in the advertising landscape and a concentration of spending, have raised concerns among investors. Additionally, I believe that Magnite, Inc.'s future appears uncertain due to its leveraged balance sheet

The upcoming Q3 results will be crucial in determining whether Magnite can meet revenue growth expectations. Analysts' skepticism about its 2024 prospects echoes my own doubts about the company's future performance.

Notably, the shift in interest rates has brought attention to Magnite's leveraged balance sheet, previously overlooked in a period of low rates and solid growth. As a result, uncertainty lingers about Magnite's potential for recovery, leaving me neutral and on the side.

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