2023-06-12 13:32:22 ET
Summary
- Magnite is an omnichannel SSP focused on capitalizing on the CTV opportunity.
- The company has been investing in areas such as data and privacy tools, as well as supply path optimization. These efforts could help to strengthen the company's competitive position.
- Despite the stock's recent move higher, the company's valuation remains fairly modest, provided the company can execute its strategy.
Magnite's ( MGNI ) stock has performed well over the past eight months, in part due to improving market sentiment and a low valuation. The stock could still have significant further upside in the long run though, if the company can fulfill its lofty ambitions. Despite this potential, the near term remains clouded by an uncertain macro environment and a rapidly evolving adtech ecosystem.
Market
Magnite is a Supply Side Platform in the adtech supply chain, providing a number of services to publishers. SSPs have historically been less attractive businesses than DSPs, as the market has been fragmented and largely undifferentiated. This appears to be changing though, with SPO driving consolidation and data enabling differentiation.
Figure 1: Digital Advertising Landscape (source: Magnite)
Magnite provides an omni-channel platform, including display, online video, audio, mobile and CTV. While the majority of Magnite’s revenue comes from DV+ markets, CTV is expected to dominate revenue in the future, making the structure of this market critical to Magnite’s long-term success.
The CTV advertising market is still nascent, with ad spend trailing viewership and buyers not really making the most of the real-time bidding and data capabilities of the channel. Viewers have been steadily moving towards CTV in recent years, and this trend will continue, driven in large part by demographics. A significant portion of CTV is currently supported by subscriptions, but it appears likely that the use of advertising will increase. 83% of viewers would rather watch ads in exchange for free or low-cost content than pay for ad-free content and 74% of SVOD subscribers would switch to an ad-supported tier if it was offered.
Figure 2: Linear and CTV in the US (source: Magnite)
Video ad spend is moving online and increasingly towards programmatic buying. For example, Disney ( DIS ) continues to rapidly scale its programmatic offerings and expects to be 40-50% programmatic by 2024. This should benefit the adtech ecosystem, but it could take time for buyers and publishers to adjust to the capabilities of CTV.
Figure 3: Video Investment Plans - 2021 versus 2020 (source: Magnite)
The adtech market structure has historically been unfavorable for SSPs, leading to poor financial performance, but this could slowly be changing. EMX recently declared bankruptcy and Yahoo! Is closing its SSP business. While this could be considered evidence of ongoing difficulties, Magnite believes that it is only undifferentiated SSPs that are being forced out of the market. Magnite has also acquired a number of SSPs in recent years, contributing to consolidation.
Header bidding led to a proliferation of SSPs, undermining Magnite’s (The Rubicon Project) financial performance. Many of these players provided no value other than arbitrage, but Supply Path Optimization is now forcing many of these companies out of the market.
Magnite stands to benefit from Supply Path Optimization in several ways.
- Capture more ad spend as competitors are forced out of the market
- Sellers are likely to migrate to differentiated SSPs
- Buyers are likely to consolidate spend on a select list of SSPs
While there is potential for SPO to result in disintermediation by companies like The Trade Desk ( TTD ), this doesn’t appear to be the most likely outcome at this stage. Rather, The Trade Desk appears to be supportive of forcing players out of the value chain that do not provide value.
Magnite doesn’t believe there is a risk of direct buying from publishers as it can add value by overlaying data. SSPs help publishers to maximize the value of their inventory and provide a range of services that most publishers are likely to find difficult to replicate. Publishers need SSPs for:
- Centralization – unified audiences across disparate quality sources
- Automation
- Advanced reporting
- Tailored targeting
- Control
- Real-time functionality
While Magnite has a large and growing opportunity, it currently faces a difficult macro environment. Magnite observed ad spend weakness that began in late Q4 and continued into Q1, but subsequently began to pick up in February and March. Magnite believes that current CTV headwinds are purely due to the macro environment, as top of the funnel budgets are generally the first to be paused.
Walled Gardens
Changes in the advertising ecosystem and current macro weakness are combining to undermine the strength of walled gardens, like Meta ( META ), Google ( GOOG ), Roku ( ROKU ) and Snapchat ( SNAP ). Magnite, amongst other adtech companies, believes that these walled gardens will increasingly be forced to open up to new sources of demand. This is something that more companies have begun to discuss in recent quarters. For example, Roku has talked about opening up to third-party demand, with Magnite as a primary partner.
Magnite believes that its growth relative to the walled gardens in Q1 demonstrates the importance of an open approach. There is an excess of supply over demand at the moment due to the weak macro environment though, and there is a risk that adtech companies are over extrapolating based on this current situation. An improvement in market conditions could lead to a shift in the balance of power back towards publishers.
Magnite
Magnite is an omnichannel ad server/SSP, although the company is focused on CTV. While SSPs have generally been poor businesses in the past, Magnite believes it is a leader because of proprietary demand, independence and scale. Consolidation is potentially helping the company, along with a focus on providing additional value to sell-side partners.
Magnite DV+ is Magnite’s platform for display, online video, audio, etc. Magnite is hoping to increase its share in this market from 9% to 20% . Within CTV, Magnite believes its market share is currently around 20-25%.
Figure 4: Magnite's Ad Tech Solutions (source: Magnite)
Magnite has been investing in a number of areas:
- Demand Manager - get the most from the header
- Carbon RMP - help publishers take back control of audience and addressability as third-party cookies are phased out
- SpringServe for CTV ad serving
- Demand Facilitation Team that delivers proprietary demand at global scale
Prebid
Magnite's Prebid and Demand Manager provide a programmatic decision layer that complements the company's ad server. The Rubicon Project co-founded with Prebid.org in 2017 and launched demand manager in 2019. RTK was also acquired in 2019 to accelerate Demand Manager innovation.
Figure 5: Prebid Open Source Projects (source: Magnite)
Demand Manager
While header bidding increased publisher revenue, it also increased complexity. Demand Manager allows publishers to configure and deploy their own Prebid-based header bidding solutions. It is a reporting and analytics tool, with Magnite providing on-demand support, which supports publisher decision making and enhances monetization and control.
Figure 6: Demand Manager Growth (source: Magnite)
CTV
Magnite has been aggressively pursuing the CTV market in recent years, and the company's future is largely dependent on the success of this effort. Magnite acquired Spotx in 2021 for approximately 1.2 billion USD stock and cash. SpotX is a leading platform for CTV and video advertising globally.
The stated reasons for the acquisition included providing better support for sellers and improving scale and efficiency for buyers. At the time of the acquisition, Magnite was targeting in excess of 35 million USD of annual operating cost synergies, half of which was expected to be realized within the first year. SpotX generated 116 million USD in non-GAAP net revenue in 2020, 67 million USD of which was from CTV.
SpotX provided Magnite with access to the SpringServe ad server. Ad servers manage, store, and serve ads, enabling advertisers and publishers to distribute ads across channels. They are critical to the success of CTV publishers, as a lot of inventory is still transacted directly.
Figure 7: The SpringServe Platform (source: Magnite)
Magnite Streaming was launched in February 2023 . This is Magnite’s CTV and OTT platform after the integration of Magnite and SpotX technologies. Magnite expects to have finished migrating all customers around the end of Q2, which should lead to greater efficiency and decreased costs in Q3 and Q4. Customer feedback has reportedly been positive so far.
Figure 8: Platform Integration Opportunity (source: Magnite)
CTV publishers need supply side partners that can support their needs across both programmatic and direct buying, and Magnite Streaming is well positioned to provide this.
The shift from direct to programmatic buying should be revenue and margin accretive for Magnite, as the company provides additional value. This is slowly occurring, with both publishers and buyers becoming more comfortable with the concept of programmatic buying for high value inventory like CTV. Buyers want to use data overlaid buys from a targeting standpoint and publishers are having to acquiesce given the weak demand environment.
Figure 9: Magnite CTV Rate Card (source: Magnite)
Partnerships have also been a focus area for Magnite, including new or expanded relationships with Brightcove, fuboTV, Horizon Media, Criteo and Disney. Magnite is Disney’s global programmatic SSP partner, across the portfolio of Disney properties.
Data Privacy Solution
Magnite continues to work on CTV audience creation and targeting, with the goal of helping publishers extract value from first-party data while protecting user IDs. This could represent a structurally favorable shift relative to other types of digital advertising where the buy side would typically perform this work through third party cookies. Data clean rooms build publisher value as on-ramps to first and third-party data sets.
Figure 10: Magnite Clean Rooms (source: Magnite)
Data clean rooms are just one type of privacy solution. Google's Privacy Sandbox enables targeting and attribution in a more privacy friendly manner than cookies or device IDs. User data still appears to be collected with Privacy Sandbox, just at a more aggregate level. Industry IDs are an alternative to cookies and device IDs that aim to enable targeted advertising while protecting user privacy. Audience segments are lists of users that are grouped based on some attribute (age, gender, websites visited, etc.), which allows some level of targeting while protecting privacy.
Data clean rooms themselves are likely to have fairly low barriers to entry, with value accruing to owners of proprietary data and companies that can bring data and advertisers together.
Figure 11: Magnite Investments in Identity & Audience (source: Magnite)
Carbon RMP
Carbon RMP is an end-to-end revenue management platform. It helps publishers measure, manage and monetize their audiences in real-time. Magnite acquired Carbon in 2022 to help build out its audience and identity tools across channels.
The deprecation of third-party identifiers has created a need for privacy-focused identity solutions. Magnite believes that seller-defined audiences will be an important part of the adtech ecosystem going forward.
ClearLine
Magnite announced the launch of ClearLine in April 2023. This is a self-service solution that gives buyers direct access to video inventory across all Magnite publishers. This is beneficial for buyers as it helps them to avoid high take rates. ClearLine could also help expand the size of the CTV ad market by shifting spend from upfront linear TV.
Magnite has emphasized that this is not an alternative to DSPs. Instead, it aims to bring advertising spend into the CTV market which, in time will likely end up being more programmatic. ClearLine can provide programmatic type capabilities, like targeting and audience segmentation.
Financial Analysis
Revenue ex-TAC grew 8% and CTV revenue ex-TAC grew 10% in the first quarter. Connected TV is currently driving Magnite’s growth, and management believes they are gaining share in this market.
Revenue ex-TAC is revenue excluding traffic acquisition cost ("TAC"). Traffic acquisition cost represents what Magnite must pay sellers for the sale of advertising inventory.
Automotive, travel and food and beverage have been areas of strength in recent quarters, offset by weakness in retail, technology and health and fitness. From a geographic perspective, international regions have been outperforming the US.
Magnite expects revenue ex-TAC growth to be roughly 9% YoY in the second quarter of 2023. CTV revenue ex-TAC growth is also expected to be approximately roughly 3%. For 2023, revenue ex-TAC growth for the full year is expected to be in the high single digit range.
Figure 12: Magnite Revenue (source: Created by author using data from Magnite)
CTV results were driven by strong performance in the SpringServe ad server business and Magnite’s managed service business. Within the DV+ business there was a broad-based improvement across many of the DSPs that Magnite works with. DV+ growth is a result of improving the fill rates between publishers and DSPs.
Table 1: Magnite Revenue ex-TAC by Channel (source: Created by author using data from Magnite)
Magnite’s expenses are currently elevated, but a significant proportion of these expenses are non-cash. Management expects to recognize additional accelerated amortization expense of 53 million USD in Q1, 53 million USD in Q2 and 8 million USD in Q3 of 2023. Magnite expects to shift a unified platform in the third quarter, which should help to reduce costs later in the year.
Operating profit margins remain negative, but Magnite is generating solid free cash flows. Magnite is focused on reducing costs though, executing a 6% workforce reduction in January. These layoffs were mainly targeted at duplicative engineering roles across the two CTV platforms, and hence may have been pre-planned rather than in response to market weakness.
Figure 13: Magnite Profit Margins (source: Created by author using data from Magnite)
Figure 14: Magnite Operating Expenses (source: Created by author using data from Magnite)
Magnite expects approximately 50% of future revenue growth to flow through to the bottom-line, leading to improved profitability in time. This is because a relatively small proportion of expenses are variable, although Magnite’s definition of variable costs is narrow.
Regardless, margins should become quite high as the company scales, provided the industry structure remains favorable. For example, Magnite has a long-term target for operating profits in excess of 40%.
Figure 15: Magnite Operating Expenses (source: Magnite)
Valuation
Magnite has ambitious growth and margin targets, which, if met could create significant shareholder value. In the next five years Magnite wants to:
- Process 15-20 billion USD in ad spend annually (currently several billion)
- Increase CTV market share to over 30% (from 20-25%)
- Increase DV+ market share to over 20% (from high single digits)
The company's current valuation is more reflective of current headwinds than Magnite's upside potential. There is also the potential continuing skepticism regarding the strength of the SSP business model. Based on a discounted cash flow analysis, I estimate that the intrinsic value of Magnite's stock is roughly around 25 USD per share.
Figure 16: Magnite EV/S Multiple (source: Seeking Alpha)
For further details see:
Magnite: A Long-Term Opportunity With High Risk