Magnite Strong Q4 Overshadowed by Weak Guidance; $15.50 FVE; Shares Becoming Attractive Again

Senior Equity Analyst

Ali Mogharabi

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Magnite, formerly The Rubicon Project, has successfully transitioned from an online digital ad exchange platform to one of the leading complete independent sell-side platforms in the programmatic digital ad market. The firm continues to focus on the connected TV, or CTV, market which we estimate will grow around 21% per year in the U.S. through 2027. With publishers such as Disney, Fox, and fuboTV expanding CTV inventory, we think Magnite’s revenue growth can outpace the market.

We like Magnite’s investments to not only assist CTV players with the transition to programmatic advertising (via the acquisition of ad server firm, SpringServe, through SpotX) but also its focus on interoperability with traditional TV, which could accelerate the growth of volume through its platform more quickly than it otherwise would. 

We think Magnite has opportunities to strengthen its relationship with publishers (including websites and mobile apps) and technology providers on the demand side. The firm continues to prioritize supply path optimization when working with advertisers, their agencies, and demand-side platforms, seeking shorter and more efficient paths to access ad inventory. This allows Magnite to utilize more of its publishers’ first-party data along with its transaction data to better match the inventory with the demand, which could generate higher fill rates and yields. In addition, we think actions by Apple on the data front, along with the upcoming elimination of third-party cookies by Google, will increase publishers’ dependency on Magnite. 

However, we do not expect the firm to take market share from or displace much larger competitors such as Google, Amazon, and possibly Microsoft, which entered the market via the acquisition of Xandr from AT&T. Also, given the fragmented supply-side platform market, competitors may begin to apply aggressive pricing (or cut take rates) to either maintain or gain market share. At the same time, given the indications of consolidation that Magnite has spearheaded the last couple of years, we don’t expect the firm to be an acquisition target for Google, Amazon, or Microsoft.

Business Strategy & Outlook

We believe that Magnite lacks economic moat sources that can be maintained for at least 10 years. While the firm could be on the cusp of becoming a leader in the non-Google supply-side platform, or SSP, market, we believe its ad exchange’s weak network effect lessens the chances of that taking place. 

The network effect around Magnite’s exchange was severely weakened beginning in 2016 when the firm did not pursue header bidding. Other online advertising marketplaces adjusted more quickly, attracting more buyers and sellers, hurting the firm’s exchange. Impressions (ad inventory) sold or purchased on Magnite’s exchange declined 11% in 2016 and 29% in 2017. Revenue growth decelerated significantly to 13% in 2016 (from 81% in 2015), followed by declines of nearly 40% and 20% in 2017 and 2018, respectively. Take rates during 2017 and 2018 also declined. 

While the firm began to display improvement in 2019 (strong revenue growth and slight increase in take rate), in 2020 it merged with Telaria and stopped reporting those key metrics. However, since the merger and the acquisition of SpotX, the firm’s pro forma revenue figures indicate deceleration even amid the fast-growing digital advertising market in the second half of 2021.

While we think the firm will gain significant traction within the fast-growing CTV ad market (our estimate of an 18% CAGR through 2027) via the Telaria merger and acquisition of SpotX, we are not yet confident that it will result in the return of a strong enough economic network effect moat source. Other participants in the fragmented ad technology space, including the large ones like Google, are pursuing the same goals. 

In addition, while services beyond just matching a seller with a buyer will help the firm attract and retain publishers, those services are not differentiated much from competitors. They include helping publishers manage their inventories, maximize the value of the inventory, meet frequency requirements, process transactions in real-time, and notify the publishers’ ad servers. Plus, while we believe Magnite’s efforts to sign more agreements with the demand side (decreasing costs associated with paths to the ad inventory) could strengthen its relationship ad buyers, its peers have also begun to focus on supply path optimization deals. 

We do not think the presence of Google, which has consistently dominated the SSP market, will significantly hinder the possibility of Magnite creating a stronger network effect as Google is likely to remain less aggressive on pricing given the pressure that it continues to face from the Department of Justice regarding antitrust matters. However, we think there will be pricing pressure among the smaller firms as publishers will continue to work with multiple SSPs. According to Advertiser Perceptions, publishers are likely to use 5.8 SSPs on average this year. While we estimate this is down from the second half of 2020 (as the pandemic drove a significant shift to online advertising), it is slightly above the second half of 2021 which stood at 5.4 SSPs per publisher. One can assume that one of those SSPs is likely to be Google as Advertiser Perception’s survey in the second half of 2021 indicated that 73% and 36% of publishers surveyed use Google Ad Manager and Google AdMob (which only focuses on apps), respectively. However, we do feel confident that Magnite will be in the mix given the acquisition of SpotX. 

We also think further consolidation on the SSP side may take place, as publishers look to have two or three Google and Amazon competitors available. Magnite could make additional acquisitions, but they likely will be small tuck-ins as the firm has already paid a lot for SpotX, $1.2 billion or 7 times trailing 12-month revenue.

None

Economic Moat

Magnite

Magnite, Inc. provides a technology solution to automate the purchase and sale of digital advertising inventory for buyers and sellers. It features applications and services for digital advertising sellers including websites, mobile applications, and other digital media properties. The company was founded by Frank Addante, Duc Chau, Craig Roah, Julie Mattern and Brian D. Baumgart on April 20, 2007 and is headquartered in New York, NY.

Earnings data Q1 2024

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JAKARTA, Indonesia, Nov. 28, 2023 (GLOBE NEWSWIRE) -- Magnite (NASDAQ: MGNI), the world's largest independent sell-side advertising company, today unveiled its latest research study, “Streaming TV's New Era: Embracing Ad-supported Streaming Across Screens in Indonesia.” The research finds that ad-supported streaming in Indonesia continues to gain momentum and 69% of TV viewers in Indonesia watch ad-supported streaming.

Magnite Research Highlights Opportunity for Brands Amidst Growth of Ad-supported Streaming in Indonesia

Magnite's Q3 results showed mixed performance, with decelerating growth and improved profitability. Despite improving cash flows, weak guidance and macro challenges have prevented Magnite's share price from increasing. While there are reasons to be concerned about Magnite's business long-term, the company's valuation more than accounts for this.

Magnite: Strong Cash Flows Will Matter Eventually

Trial campaign with French advertiser successfully reduced carbon output by 24% while maintaining strong performance Trial campaign with French advertiser successfully reduced carbon output by 24% while maintaining strong performance

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Pubmatic

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SINGAPORE, Nov. 14, 2023 (GLOBE NEWSWIRE) -- Magnite (NASDAQ: MGNI), the world's largest independent sell-side advertising company, today unveiled its latest research study Streaming TV's New Era: Embracing Ad-supported Streaming Across Screens in Southeast Asia. The research, which spans markets including Singapore, Indonesia, Philippines, Thailand and Vietnam, finds that ad-supported streaming services deliver scale and impact for brands and that 71% of TV viewers in Southeast Asia watch ad-supported streaming, closing the gap with traditional TV viewers.

Magnite Research Uncovers Ad-Supported Streaming Services Deliver Scale and Impact for Brands in Southeast Asia

Magnite, Inc. (NASDAQ:MGNI ) Q3 2023 Earnings Conference Call November 8, 2023 4:30 PM ET Company Participants Nick Kormeluk - IR Michael Barrett - President and CEO David Day - CFO Conference Call Participants Jason Kreyer - Craig-Hallum Shyam Patil - Susquehanna Dan Kurnos - The Benchmark Company Laura Martin - Needham Nick Zangler - Stephens Shweta Khajuria - Evercore ISI Matt Swanson - RBC Capital Markets Dan Day - B. Riley FBR Tim Nollen - Macquarie Operator Good afternoon and welcome to the Magnite Third Quarter 2023 Earnings Conference Call.

Magnite, Inc. (MGNI) Q3 2023 Earnings Call Transcript

NEW YORK, Nov. 06, 2023 (GLOBE NEWSWIRE) -- Magnite (NASDAQ: MGNI), the largest independent sell-side advertising company, today announced that members of its executive team will participate in the following financial conferences:

Magnite to Participate in Upcoming Financial Conferences

Magnite, Inc.'s future seems uncertain due to its highly leveraged balance sheet. Challenges in the CTV sector, like a shift in the advertising landscape, worry me. I share analysts' skepticism about Magnite's 2024 prospects.

Magnite: Adapting To Uncertain Terrain, Why I'm Neutral

Omnicom Group

OMG's Council on Accountability and Standards (CASA) Continues to Turn Up the Heat on Transparency and Safety During Advertising Week NEW YORK , Oct. 17, 2023 /PRNewswire/ -- Omnicom Media Group (OMG), the media services division of Omnicom Group Inc. (NYSE: OMC) has launched an SSP Standardization Initiative to drive practices and capabilities that will increase advertiser ROI and brand safety for SSP investment by enabling buyers to curate premium inventory at scale.  The standards were developed by OMG's Council on Accountability and Standards in Advertising (CASA) -  a collaboration of OMG agencies, clients and media partners committed to enhancing quality control and transparency for advertisers across CTV, retail, social and SSP channels -  and are organized  around four core advertiser rights and partner capability pillars.

As MFA Issues Puts Programmatic Curation Center Stage, Omnicom Media Group's SSP Standardization Initiative Assures Premium Inventory That Delivers on Value and Values Mandates

Magnite's stock has fallen due to a rough patch in the CTV and digital ad market, but it's well placed to benefit from a recovery in the market. The company is gaining market share and has finished integrating its acquisitions, allowing it to develop new solutions. A shift towards programmatic ads may hurt in the short term but will be beneficial in the long run, aided by new high-value services.

Magnite Is A Recovery Candidate

Magnite (MGNI) introduces ML-driven recommendations for A/B testing within its Demand Manager product.

Magnite (MGNI) Reveals ML-Powered Feature for Demand Manager

NEW YORK, Oct. 05, 2023 (GLOBE NEWSWIRE) -- Magnite (Nasdaq: MGNI), the world's largest independent sell-side advertising company, will announce its financial results for the third quarter ended September 30, 2023 after the market close on Wednesday, November 8, 2023. The Company will host a conference call at 1:30 PM (PT) / 4:30 PM (ET) the same day to discuss its financial results and outlook.

Magnite to Announce Third Quarter 2023 Financial Results on November 8, 2023

Machine Learning Wrapper Optimization enables one-click A/B testing for Prebid recommendations Machine Learning Wrapper Optimization enables one-click A/B testing for Prebid recommendations

Magnite Unveils New Demand Manager Feature Powered by Machine Learning to Help Publishers Earn Incremental Revenue

Magnite (MGNI) partners with Snowflake's Media Data Cloud to enhance secure data activation for agencies, advertisers and media proprietors within the company's streaming inventory.

Magnite (MGNI) Partners With Snowflake to Boost Data Security

NEW YORK--(BUSINESS WIRE)--Yahoo partners with FreeWheel, Magnite's SpringServe, and Publica by IAS to boost CTV inventory within direct-to-publisher offering, Yahoo Backstage.

Yahoo Backstage Boosts CTV Capabilities with FreeWheel, Magnite's SpringServe, and Publica by IAS Integrations

Magnite (MGNI) collaborates with Scope3 to enhance sustainability in omnichannel advertising.

Magnite (MGNI) & Scope3 Team Up for Sustainable Advertising

Layering Scope3 data across Magnite's vast video, display and mobile inventory will help advertisers better understand and reduce their carbon footprint Layering Scope3 data across Magnite's vast video, display and mobile inventory will help advertisers better understand and reduce their carbon footprint

Magnite Announces Global Partnership with Scope3 to Improve Sustainability Across Omnichannel Advertising

Magnite (MGNI), along with SpringServe, now provides FAST ad management support for Virgin Media TV services.

Magnite (MGNI) and SpringServe Support FAST Ad Management

Expanded collaboration makes Magnite's streaming TV inventory available for local linear TV buyers through Mediaocean Expanded collaboration makes Magnite's streaming TV inventory available for local linear TV buyers through Mediaocean

Magnite Inks Deal With Mediaocean to Boost Access to CTV For Local Linear Buyers

LONDON, Aug. 30, 2023 (GLOBE NEWSWIRE) --  Magnite (NASDAQ: MGNI), the world's largest independent omnichannel sell-side advertising company, has been selected as the preferred SSP to support Virgin Media's free ad-supported streaming television (FAST) channels. Virgin Media will also leverage SpringServe, Magnite's ad serving platform built for OTT, CTV and video advertising.

Magnite and SpringServe Support FAST Ad Management for Virgin Media TV Services

Magnite's Q2 results were disappointing, with soft CTV growth and non-cash expenses weighing on margins. Despite a stabilization in digital advertising, SSPs are struggling due to revenue mix shift pressuring take rates and an oversupply of ad inventory. Magnite's current share price could represent an attractive entry point, but SSPs have a history of disappointing investors and industry tailwinds are yet to improve the competitive landscape.

Magnite: Competitive Positioning Is Questionable

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Strayer Education

While it's always nice to read a range of opinions about the market, targeting top Wall Street upgrades this week may be a more sensible choice. Fundamentally, the major indices have printed red ink as economic jitters again rose to the forefront.

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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.

Magnite: The Crash Creates An Opportunity

Magnite's Q2 earnings exceeded analysts' expectations. But the growth of its CTV business decelerated from the third consecutive quarter, and it expects that slowdown to worsen in Q3.

Is It Too Late to Buy Magnite Stock?

Magnite stock fell on weak guidance for the third quarter. Like much of the rest of the digital-ad sector, the company is seeing weak growth.

News for Magnite Stock (MGNI)