2023-05-12 06:11:13 ET
Summary
- Magnite reports Q1 results that were more than satisfactory.
- Investors latched onto the idea that CTV could once again reaccelerate. After growing by 10% y/y in Q1, it's expected to grow 12% y/y in Q2.
- Magnite's balance sheet remains substantially leveraged.
Investment Thesis
Magnite ( MGNI ) is a leading supply-side advertising platform (''SSP''). In plain English, this means that Magnite is a commoditized brokerage platform where advertising space can be bought.
The way to think about Magnite, is the same as you'd buy a stock via your brokerage firm. But what Magnite is attempting to deliver is more in the way of programmatic inventory.
This means that rather than negotiating via direct sales for advertising space, brands, and ad agencies are able to rely on programmatic advertising to maximize ROIs for advertising, by lowering their advertising costs.
The stock is not a clear-cut buy, as there continues to be a lot of headwinds that Magnite has to overcome, particularly with regards to how it balances growth, while at the same time delivering its balance sheet.
All that being said, I believe that investors' expectations have been sufficiently suppressed, that anything that isn't strictly bad news , investors are more than willing to give Magnite a pass on.
Why Magnite? Why Now?
Magnite is an adtech business. A sector that has been remarkably out of favor with investors. Why? Because recession fear continues to pervade the market leading Magnite's share price to be very volatile.
For context, consider the graphic below which highlights Magnite's different advertising channels.
What we can see right now is that CTV makes up around 40% of the total business.
And that's the key area that Magnite is putting the bulk of its resources behind. The main question for investors is this, can Magnite as a leading supply-side platform continue to outgrow its peers and take market share? In an effort to assuage investors' concerns, this is what Magnite opened its earnings call with:
Our growth and outperformance relative to walled gardens and numerous peers in Q1 is further evidence that our strategy is working and there is a big opportunity for a leading sell-side platform to serve the open Internet. It is most evident in CTV. (emphasis added)
Before going further, let's attempt to understand what Magnite is trying to benefit from. Magnite seeks to be able to monetize CTV and other digital surfaces, including mobile, so that brands can advertise away from the walled gardens of advertising.
There's been a crack made in the advertising walled gardens. Meaning that to reach viewers, particularly on CTV, brands are being forced to opt for players with substantial inventory but not necessarily on Alphabet's ( GOOG )( GOOGL ), Meta ( META ), or Amazon's ( AMZN ) properties. However, before readers get too excited, I should remind readers that these walled garden players have ample wherewithal to ensure they remain dominant in digital advertising.
Revenue Growth Rates Continue To Trickle Along
Magnite's growth rates are not magnificent, but rather middle-of-the-road, with about 10% revenue growth rates including Traffic Acquisition Costs. However, given that the advertising market is as weak as it is, for Magnite to continue to guide that it's going to tick along at a steady rate into the end of 2023, has been welcomed by investors.
Arguably, the most compelling aspect to the bull case is the inroads that Magnite continues to make into the CTV market. In Q1 2023, CTV made just a nudge below 10% y/y growth rates. And looking ahead to Q2 2023, at the high end of the guidance, Magnite's CTV revenues could reach 12% y/y revenue growth rates.
Recall, Q4 2023 saw its CTV revenues growing at nearly 20% y/y. And at the time of the Q4 report, CTV was being guided for Q1 to grow by a paltry 7% y/y at the high end . For investors, given the hopes they had for Magnite's CTV prospects, for CTV to go from about 20% y/y growth rates, down to 7% y/y growth rates was not commensurate with a secular growth story.
However, when Magnite's Q1 ultimately was reported, CTV revenues grew by 10% and the guidance ahead for CTV points to 12% y/y revenue growth rates. In short, the CTV story can still have some room to positively impress investors.
This would be a reacceleration from Q1 and particularly welcome
MGNI Stock Valuation - 16x Forward Free Cash Flow
Magnite continues to assert as it has done in the previous quarter that it will report at least $100 million of free cash flow in 2023.
This puts the stock priced at 16x forward free cash flow. That's not an exaggerated multiple, by any stretch. But it is extended relative to other adtech players such as Digital Turbine ( APPS ) and PubMatic ( PUBM ).
Furthermore, compared with its peers, Magnite's balance sheet holds a significant amount of leverage.
More specifically, Magnite holds more than $400 million of net debt. Meaning that even if Magnite wished to pay down all its debt, it would take more than 4 years, assuming a stable advertising market, and longer if the advertising market were to weaken further.
The Bottom Line
The advertising sector is starting to show some green shoots of vitality. I'm not going to assert that everything is perfect. Far from it. But it appears to me that it's looking more healthy than it has in a very long time.
For further details see:
Magnite Q1 Earnings: Making A Comeback