Summary
- Magnite's guidance leaves investors wanting more, particularly after the stock ran up more than 100% in 4 months.
- The element that weighed the stock down the most is that its CTV growth prospects are now pointing to just 6% y/y growth rates, down from 20% y/y in Q4.
- The one aspect that will in time support the share price is that Magnite's free cash flows in 2023 are expected to be higher than $100 million.
- This leaves the stock priced at around 15x forward free cash flows. Not a stretched multiple by most considerations.
Investment Thesis
Magnite ( MGNI ) took investors by surprise as Magnite's guidance ahead didn't match investors' expectations. Recall, as we headed into this earnings season, in the past 4 months the stock was up 100%.
Furthermore, on top of the stock's performance being noticeably strong as it headed into earnings, the one aspect that investors had been particularly excited about was Magnite's CTV prospects. And these prospects are now guided for only 6% y/y revenue growth rates in Q1. Thereby putting a stop to any growth narrative coming out of MGNI.
All that being said, there are positive aspects too, including the fact that Magnite is guiding for at least $100 million in free cash flows.
Investors Wanted to Welcome a Turnaround Story
As the graphic above reminds us, Magnite was being cheered on as a turnaround story. Not only was the stock up more than 100% headed into earnings, but it had massively outperformed its peers. In short, expectations were extremely strong.
Revenue Growth Rates Decelerate Further
The problem for Magnite is that its revenue growth rates continue to decelerate. The high end of its guidance, assuming about 12% of TAC costs, would put its revenue growth rates at about 7% y/y for Q1. This would be the slowest organic growth in many quarters.
Thus, the combination of strong investor excitement, together with low fundamental performance, has caused investors to take profits off the table.
But there's more to this story too.
EBITDA Margins Killed the Excitement
Magnite ended Q4 2022 with adjusted EBITDA margins of 41%. Reinforcing the overall narrative that although the business wasn't growing at a rapid rate, it could at least be highly profitable. Something that investors are rewarding particularly strongly in the current high-interest rate environment.
However, Magnite's guidance for Q1 2022 points to its adjusted EBITDA margins coming in at 16% at the midpoint. Even if Magnite ultimately reaches 18% of adjusted EBITDA margins, when compared with Q1 2022 where Magnite reported adjusted EBITDA margins of 27%, this is a 900 basis point compression y/y.
Put another way, not only slower growth, but less enticing margins too.
That being said, Magnite contends that its bottom line prospects will improve in the second half of the year, so that its free cash flow for 2023 will be at least $100 million.
On yet the other hand, given that Magnite's free cash flow in 2022 was slightly over $160 million, this is quite a substantial drop in its free cash flow prospects.
MGNI Stock -- Challenging Valuation
I find it very challenging to value MGNI. The positive consideration will undoubtedly be supported by its free cash flow outlook. After all, $100 million of free cash flow leaves the stock at around 15x forward free cash flows. That's really not an expensive valuation.
On the other hand, there's some uncertainty over Magnite's prospects, given that the bulk of the free cash flow will only present itself in the second half of 2023.
Consequently, investors are being asked to take a leap of faith that everything will work out OK in the end, even if the business isn't really reporting strong free cash flows right now.
The Bottom Line
To summarise the situation I would argue that the biggest problem for Magnite is that its shares soared so hard in the past 4 months. Meaning that investors had huge hopes that Magnite would be able to positively impress investors.
However, I don't believe that the stock is particularly expensive at somewhere close to 15x free cash flows.
For further details see:
Magnite Q4 Earnings: At Least $100 Million FCF In 2023