2023-08-15 13:30:36 ET
Summary
- Magnite stock crashed last week after reporting better-than-expected revenue and earnings, with the company painting a not-so-promising picture for the CTV ad market.
- The landscape of digital advertising in 2023 has presented a series of formidable challenges that have cast shadows across the industry.
- Magnite is gearing up to capitalize on several macroeconomic opportunities to revive growth.
Some companies deserve to be punished in the market, while others are punished irrationally. Magnite, Inc. ( MGNI ) stock crashed last week after reporting better-than-expected revenue and earnings, with the company painting a not-so-promising picture for the connected TV ((CTV)) ad market in the remainder of the year despite benefiting from a recovery of the ad market in the second quarter. After digesting Q2 earnings and analyzing the prospects for the advertising industry, I am inclined to believe the recent crash has pushed MGNI stock into the undervalued territory once again, with the stock down 13% in 2023. At a forward P/E of 15.5 and a forward P/S multiple of 2.0, I believe Magnite is now valued cheaply in the market given that I expect the company to emerge as a big winner of the expected growth of the CTV ad market and the programmatic ad market.
Decent Performance In A Challenging Market
Magnite is the world's largest independent sell-side advertising company, which helps publishers and brands win across every channel and format. The company was formed in 2020 after a merger between Rubicon Project, an online ad exchange, and Telaria, a supply-side platform focused on streaming video. In 2021, Magnite acquired SpotX, another leading SSP in the connected TV market, for $1.2 billion. The company generates the majority of its revenue from the programmatic sale of CTV ad inventory, and the rest from mobile online sites and apps, and websites accessed via computer. Magnite has partnerships with various media companies, such as A&E Networks, AMC Networks Inc. ( AMCX ), Disney Advertising, FOX Digital, and Warner Bros. Discovery, Inc. ( WBD ).
In the ever-evolving landscape of digital advertising, Magnite continues to showcase its strategic resilience and adaptability, as evidenced by its second-quarter performance.
A notable highlight was the success of the DV+ business, which recorded a 10% year-over-year growth in contribution ex-TAC, defying the prevailing industry trend of weakened CPMs. This performance is a result of a strategic shift, with the company implementing a series of technical enhancements and consolidations within its online video operations and optimizing ad spend performance. The evident market share gains underscore the efficacy of these efforts, solidifying the company's position as a leader in the field. The momentum of Magnite's DV+ business transformation is poised to carry forward, with expectations of continued strength in the coming quarters. The company's investment in technology, coupled with its commitment to partner-centric solutions, is poised to amplify the impact of these positive results.
The landscape of digital advertising in 2023 has presented a series of formidable challenges that have cast shadows across the industry. One of the main challenges is related to ad rates. This year has seen ad rates subject to the influence of inflation and cautious consumer spending. This twofold impact has resulted in lower ad rates, casting a ripple effect that has reverberated across the click-through rates of campaigns. According to data from Ezoic, ad rates for June 2023 have dipped below the benchmark set by the same period in the previous year, showcasing a decline of approximately 15-20 points.
Exhibit 1: June 2022 vs June 2023 ad rates comparison
Ezoic
Equally impactful is the shifting landscape of programmatic display ad spending. According to eMarketer, programmatic non-video display - the cornerstone of web publishers' advertising endeavors - finds itself grappling with near-stagnant growth. The trends suggest that U.S. programmatic display ad spending in 2023 is centered on video, highlighting the dynamic shift in consumer preferences and content consumption.
While glimmers of optimism are emerging on the horizon with projections of non-video programmatic digital display ad spending resuming double-digit growth in 2024 and 2025, the anticipated trajectory remains cautious.
Exhibit 2: U.S. programmatic display ad spending growth in 2023
Insider Intelligence
In 2023, the landscape of advertising spending in the U.S. is undergoing a significant shift. CTV is emerging as a major growth driver, projected to represent 16.5% of all display ad spending. This transformation is accompanied by a substantial increase in CTV ad budgets, with an average growth of 22% throughout the year. Advertisers are finding value in CTV and over-the-top advertising for several reasons. A notable 38% of advertisers point to the achievement of brand awareness and performance marketing goals as the primary benefits of these formats. This indicates that CTV and OTT are effective in enhancing the visibility and success of brands, leading to improved performance outcomes. Further, 81% of TV advertisers are redirecting their ad spending from traditional linear and cable TV advertising toward CTV and OTT. This is not only reshaping the CTV ecosystem but also causing a redistribution of influence, with larger entities seizing a more substantial stake from smaller CTV publishers.
During the second-quarter earnings call , Michael G. Barrett, CEO of Magnite, said:
We're seeing this shift manifest itself in our own partners, including Disney, Roku, Warner Bros., Discovery, and VIZIO, who are moving more inventory toward programmatic transactions and away from traditional direct-sold executions.
In the CTV segment, Magnite recorded a robust 8% growth in contribution ex-TAC. This performance exemplifies the company's adeptness in capitalizing on the CTV landscape, which continues to command attention and advertising investment. While major players are shifting their attention toward direct programmatic transactions rather than traditional direct deals, this change is giving them more influence over how advertising funds are utilized. However, advertisers are choosing services that come with lower costs, affecting the immediate financial gains for Magnite.
The managed service business experienced a temporary softness, caused by macro challenges that prompted the pause of some campaigns due to budget constraints in sectors such as automotive and entertainment. This underscores the intricate relationship between advertising expenditure and prevailing economic conditions. The observed weakness in TV upfronts - excluding sports and live events - adds further context to the current challenging climate.
Growth Opportunities
As advertisers seek flexibility and agility in their campaigns, streaming platforms and programmatic solutions are well-positioned to capitalize on the adaptable nature of the scatter market, potentially leading to increased engagement and revenue opportunities. In the second quarter, the amount of money spent on ads grew significantly more than analyst expectations, highlighting the ongoing recovery of the ad industry. As economic conditions turn favorable, Magnite is likely to benefit from the market share gains the company has reported in recent quarters.
The biggest growth opportunity for Magnite stems from the expected growth of the CTV ad market. Major entertainment businesses are aggressively increasing their CTV ad inventory, which tilts the odds in favor of Magnite as a company that has invested millions of dollars to assist the transition of the CTV market to programmatic advertising. This year, CTV ad revenue is expected to hit almost $26 billion, growing 13.2% YoY. According to GroupM projections , CTV ad revenue will continue to grow through 2028, reaching $42.5 billion.
Exhibit 3: CTV ad revenue projections
GroupM
The growth expectations for the CTV ad market can be confirmed by recent survey data published by eMarketer. The majority of advertisers surveyed by eMarketer in 2022 expect their ad budgets to shift to CTV in the future.
Exhibit 4: Percent of ad budgets shifting to CTV
eMarketer
Another growth opportunity for Magnite is the expected changes to the spending patterns of advertisers. Although many advertisers are aggressively hunting for cheap routes today due to macroeconomic uncertainty, a recovery in global economic growth will tilt the odds in favor of large players such as Magnite that provide better campaign management services and take rates.
The ongoing integration of SpotX will be another driver of growth as this acquisition paves the way for Magnite to enjoy market share gains. Although SpotX came at a steep valuation, Magnite stands to benefit from this deal in the long run as this business combination has opened the doors for the company to aggressively make inroads into the programmatic ad market. The operating margins of the company are also likely to benefit once Magnite starts realizing the cost synergies of acquiring SpotX once business conditions normalize.
Takeaway
The market sell-off following the Q2 earnings report of Magnite does not make a lot of sense from a long-term perspective, given that the company is well-positioned to benefit from the expected recovery of the advertising industry. At a fair valuation, Magnite stock offers a good opportunity for investors to gain exposure to the expected global economic growth recovery in the next couple of years.
For further details see:
Magnite: The Crash Creates An Opportunity