I got interested in researching Magnite at the end of last week after Rockleppard and Analogkid mentioned it on the The Trade Desk (TTD) thread.
Quick aside - anyone that has a TMF subscription and owns, or is interested in, either The Trade Desk or Magnite, I recommend that you read Tom G’s post on the Trade Desk premium member board from Saturday 11/7 (post 1895 on the TTD board)
I realize the growth numbers Magnite is showing recently, in the midst of the pandemic, would not typically qualify it for high growth company status as this board focuses on, but given the potential size of their market, the acceleration of the adoption of the programatic digital advertising that has taken place in 2020, the potential for advertising budgets to reaccelerate quickly as the pandemic ends, not to mention The Trade Desk’s success and investment returns to shareholders (TTD is not a competitor to MGNI but they partner in certain ways), I think MGNI is worth introducing to this board as I could easily see them ramping up to high rates of growth very soon, in 2021, and the valuation looks very reasonable right now.
And spoiler alert, after researching the company the past couple of days, I decided to reallocate about 2% of my portfolio from TTD (which was already my biggest holding before it shot up last week) to MGNI. I didn’t want to move too much since they were going to announce earnings today and I wanted to review another quarter’s performance before allocating much more than that. Now that I’ve seen Q3 results, I’m happy with them and think I’m going to keep my small 2% position about where it is for now.
In the world of digital programatic advertising, Magnite is a Supply Side Platform (SSP), as opposed to The Trade Desk which is a Demand Side Platform (DSP)
Here is a link to a site that can explain it all more simply and better than I can:
Or to break it down even simpler and high level, here is a link to a one page visual that someone posted on twitter:
Supply Side (Magnite) helps digital publishers, streaming services, etc (anyone with inventory of advertising space to sell), sell the ad spaces for the highest possible rates
Demand Side (Trade Desk) helps marketers buy ad space, across multiple websites/apps/streaming services, to place ads targeted at specific users to promote their business
SSP’s and DSP’s can work together, as Magnite explained on today’s earnings call that they work directly with Trade Desk, and others, in developing the next generation of broad industry initiatives, such as the new “unified ID” anonymous/encrypted tracking, as cookies are getting phased out.
Just a few months ago, effective April 1, 2020, two separate companies, Telaria and Rubicon Project, merged to bring together Rubicon’s programatic expertise and Telaria’s leadership in connected TV (CTV).
Technically, I believe Rubicon Project acquired Telaria and then changed their name to Magnite. So in Magnite’s filings, most of the prior period numbers shown are just the former Rubicon Project’s financial history (without Telaria), unless it specifies that the numbers are “proforma” in which case it shows the numbers as if the two companies were previously combined.
I come from an accounting background, and over the weekend, even I had a hard time deciphering some of the filings and trying to work out trends in order to do any kind of projections going forward. My guess is, if this was difficult for me, it is probably difficult for Wall Street, and may have temporarily resulted in some firms putting Magnite in the “too hard to understand/figure out” category for the time being, which may be reducing demand and artificially depressing the valuation for now. Keep in mind that last sentence contains a lot of maybe’s and guesses and I could be completely wrong.
I also think some of the proforma financial information they provide is not necessarily indicative of what the company would have done in the prior years had they actually been combined, rather than just trying to combine their historical financial data after the fact. This too might make comparisons to proforma numbers less meaningful.
MGNI vs TTD
So this section may be unfair to Magnite because, while their industries are related, and connected in many ways, they are in two very different businesses. It’s also unlikely that MGNI will ever be as dominant a SSP as TTD is becoming as a DSP, so there is good reason why Magnite is not as generously valued as Trade Desk. What I’m trying to determine is, is the gap more than it should be, and could MGNI be undervalued, given its potential?
Magnite just released earnings for Q3 today and their quarterly revenue was $61 million. TTD just reported Q3 revenue of $216 million, so TTD is roughly 3.5x the size of MGNI when it comes to revenue.
For the accountants in the room, both MGNI and TTD only record their net fees as revenue. The actual amounts their customers pay to them, they collect from their customers (advertising spend) is a much much higher amount, but due to accounting rules, because they only keep a fixed % of the spend (and other technical reasons), they have to record the revenue on a “net basis” meaning their revenue isn’t the total amount collected, but just their share that they keep, after paying the cost of the advertising. This is different than most companies that sell their product or service and record the full amount of cash collected as revenue and then net it down on another row/line by a cost of sales. MGNI does have a line on their income statement called cost of sales, but that relates to data center costs and certain sales peoples’ compensation, now what gets paid to the owner of the ad space which is already netted out of the reported revenue number.
As of right now, TTD has a market cap of about $36 billion vs MGNI only $1.2 billion. To simplify (and also because we don’t have a real set of “merged” financials for MGNI for the past year) if we annualize each of their latest quarterly revenue (which is dangerous for these companies whose businesses in the advertising industry, are pretty seasonal, so annualizing one quarter doesn’t necessarily provide a great estimate for annual, but it’s close enough for a high level comparison), TTD has a P/S of about 42, while MGNI has a P/S of only 5.
But there are good reasons for at least some of that discrepancy, as follows…
In the past two quarters, TTD had a revenue decline in Q2 of -13%, followed by Q3 revenue growth of +32%. And they have guided for +35% in Q4, which they will most likely beat.
MGNI in the past two quarters (their only two post-merger) had a proforma revenue decline in Q2 of -24% followed by Q3 proforma revenue growth of +12%. They didn’t provide guidance for Q4, but say that the improving growth trends “are continuing into the fourth quarter”
Income / Profitability
One of the reasons I’ve been a fan of TTD is their growth + consistent profitability for several years now. Staying profitable while investing for growth with a huge future market / TAM ahead of you isn’t easy to do.
In Q3 2020, TTD had $41 million of profit, about $0.84 cents per share. MGNI had a -$10 million loss, or about ($0.10) per share.
In my mind, Jeff Green, CEO of TTD is as good as it gets. Listening to MGNI’s two more recent earnings calls, their CEO doesn’t convey that same kind of charisma. But he seems to know the business very well and have a good roadmap for what needs to be done and where they need to go. Reminds me in a way of a CEO I used to work with who was soft spoken, but extremely effective in a running a company through a period of hyper growth. MGNI’s CFO was actually really well spoken on the conference call, and I liked what I heard from him.
Magnite Q3 2020
After the market closed today, the company released Q3 earnings (some of the details I’ve already described above in the “vs TTD” section above, so I won’t rehash those again):
And just another reminder that most of the year over year comparisons in the press release are comparing the combined company, Magnite, to just the Rubicon Project company (without Telaria) in the 2019 comparison columns, except where they refer to “proforma” which includes both combined.
Sequentially, they were up +44% from Q2 to Q3, which again, are the only two post-merger quarters.
They said on the call that political spend was only “low single digits” (TTD had referred to political spend as “mid single digits” on their call) so I think we can safely assume the 44% sequential growth of Magnite was more related to overall trends and growth, especially compared to the weak pandemic Q2, but probably good news that it isn’t all because of one-time nonrecurring political spend.
The stock had already risen from $9 to more than $11 last week, part of that on Friday was likely boosted by TTD’s quarterly release on Thursday afternoon and big stock move on Friday. Today it moved up to about $12, then back down to close around $11. In the after-hours it’s back up to about $12.
CTV grew by about 50% which is great, although less than the 100%+ growth that TTD reported this quarter in CTV. One analyst specifically asked why they thought their CTV didn’t grow as fast as TTD reported last week. Management guessed that maybe TTD had taken more market share and was growing above the industry rate, which didn’t exactly give me the warm and fuzzies (e.g. why isn’t Magnite taking market share too, especially given their relatively smaller size today?).
It looks like Q3 came in well ahead of what they were estimating three months ago, on the call, it sounded like they are being conservative not wanting to promise too much in near term, but they still came across as quietly-optimistic (if that’s a thing), to me.
Big Disney-Magnite News!
One of the bigger pieces of news that circulated in October was related to Disney. On Oct 1, Disney launched the Magnite-powered Disney Hulu XP Platform. Not long after, in mid October, Disney issued a press release announcing plans to accelerate the transition from traditional TV to streaming.
Multiple analysts asked about the Disney arrangement during the earnings call, but management essentially said that they aren’t allowed to reveal a lot of the details…yet. I note that Magnite didn’t even put out their own press release about any of this last month. Disney reports quarterly earnings in just a couple days on November 12th, so maybe they will be revealing more at that time, and afterwards maybe Magnite will be able to discuss it more too?
Management did say on the call that the Disney deal is important as a “proof of efficacy” and would have a “halo effect”, essentially implying that if they can handle a huge important piece of business like Disney’s streaming ad platform, that should give other big new customers confidence to sign on too. This reminds me a lot of when I first invested in MDB, one of the reasons that I suggested to some friends to also invest in Mongo, was because the game Fortnite runs on MongoDB. And given how hugely popular Fortnite was at the time, it demonstrated to the world that, if MDB can handle Fortnite without major downtimes/outages etc, it could certainly reliably handle whatever your company wants to run on it too.
Here are a couple articles with more details about Magnite and Disney:
Discovery (channel) also chose Magnite just a few weeks ago for its programatic ad platform to monetize their streaming services, at the very end of September:
If there is a snowball effect with some more big names signing on in the near future like this, Magnite’s revenue could start to grow very rapidly.
So there’s no doubt that MGNI has a lot of potential, but certainly doesn’t deserve to be valued like a TTD today. The big question is, can their revenue growth continue to trend upward and reach a high growth, or hyper growth, situation in the next year or so? If they become a dominant player on the SSP world, or even one of a couple big winners, they probably will. Management specifically referred to themselves as expecting to emerge as the leader, on today’s call. However, I’m sure they have other competitors that feel the same way too.
Disney is a big deal, and definitely played a role in my investing some chips on Magnite. I could see this investment becoming a big winner, but it’s early days and I could still see it going a lot of different ways, some not so good.
Part of me is telling myself that TTD is closer to a “sure thing” (of course nothing is actually a 100% “sure thing”) and I feel TTD will grow to be much bigger than it is today so why not just keep these investing dollars in TTD. But the following list all came together to make me decide to take the plunge and put a couple percent of my portfolio into Magnite:
- MGNI’s small market cap, only $1.2 billion, plenty of room to grow, with large possible TAM
- low P/S ratio, especially for a company that could be growing at a high clip very soon
- complication of the recent merger and lack of easy to read historical trends for the combined company possibly making it too difficult for other investors to bother with until there is more post-merger history and clarity, artificially reducing demand for the stock and depressing today’s price
- Several years of shift of programatic advertising compressed into 2020 due to the pandemic
- Advertising budgets likely to improve dramatically in 2021 compared to 2020, and then again in 2022
I would love to hear any other analysis anyone has compiled on this company as there isn’t a ton out there. I’m definitely interested in any strong negative “con” points of view too that I might not be considering.