Magnite, Inc. (MGNI) provides services in the digital advertising field for display, online video, CTV and other medium. Magnite operates a supply-side platform (SSP). Supply-side companies work with the publishers to maximize their advertising sales.
Magnite claims it is the world's largest independent SSP. To this end, the company has recently entered into several mergers and acquisitions (M&A). In spring of 2020, the company merged with Teleria, Inc., a leader in CTV technology, and in spring 2021, the company purchased SpotX. Both companies are heavily involved in the coveted connected television (CTV) sector.
Because of this, there is much optimism surrounding MGNI stock. CTV is a highly desired growth segment for companies like Magnite, Tremor International (TRMR), Perion Network (NASDAQ:PERI), the Trade Desk (NASDAQ:TTD), and PubMatic (PUBM), since CTV is not affected by changes in laws or policies relating to third-party cookies. This removes a large risk factor.
In addition, this medium is growing, while traditional cable and satellite TV is dwindling. This trend is especially true with the valuable 18-49-year-old audience.
I am neutral on this stock. (See Magnite stock charts on TipRanks)
Second Quarter 2021 Results Encouraging
Magnite reported a very successful Q2 2021 on August 5th, 2021. Magnite reports a revenue metric called “revenue ex-TAC,” or revenues less the traffic acquisition costs, or “TAC". TAC refers to the costs that are passed through to clients. This provides a clearer picture of the revenue and growth which is organic, and not simply a result of higher prices that are passed through to clients.
For Q2 2021, Magnite trounced the prior year by increasing revenue ex-TAC over 139% year-over-year. Of this revenue, over 34%, or $34.3M, was attributable to CTV. For comparison, Magnite's competitor Tremor International reported only $21M, or 15%, of its revenue ex-TAC from CTV.
Magnite also reported a net profit for the quarter, however this was due to a tax benefit of over $87M. Without the tax benefit, the company lost nearly $51M for the quarter.
It is important to consider the effect of the recent acquisitions on both results and the balance sheet. While revenues, as described above, grew tremendously, so did long-term debt. The company reported zero long-term debt for Q2 2020, however this has ballooned to over $700M as of the latest reporting period. This is quite sizable for a company generating less than $500M in top-line revenue each year.
In addition, due to stock-based compensation and mergers and acquisitions via stock issuances, the diluted weighted-average shares outstanding rose to 143M vs. 109M in Q2 2020.
Growing Diluted Share Count
This means that while revenue ex-TAC rose 138% in total, it only rose 80% on a per diluted weighted-average share basis. This is still an impressive increase from $0.39 to $0.70 per share, but tempered a bit by the dilution.
The addition of long-term debt and increase in share count are not completely negative either. They show that management is willing to be aggressive in a competitive industry, which is a positive trait, provided that management is shrewd.
Is MGNI Stock Worthwhile?
Because of the issues explained above, the forward price-to-sales (P/S) ratio of 9.09x may be too richly valued. It is higher than that of many competitors, including each mentioned in this article, except for TTD, which is a much more established company.
The stock is up over 350% in the last 12 months; however, the stock is down over 34% for the last six months, as investors reassess competition, results, and risks. It might have farther to fall before it becomes a Buy. As such, investors may want to wait for a forward P/S between 5-7x to purchase or add shares.
Analysts Very Optimistic
Wall Street analysts are extremely bullish on MGNI stock. Six of the seven analysts reported by TipRanks have a Buy rating on the stock, with one Hold rating.
The average Magnite price target is $45.86. This implies more than 57% upside from the stock’s September 17, 2021 closing price of $29.18.
Interestingly, there is a broad spread between the lowest analyst target of $37 and the highest of $70. This implies uncertainty and significant differences of opinion among analysts.
Summary on Magnite Stock
Magnite appears laser-focused on growing its CTV platform business. The company is also expecting over $500M in revenue in 2022. Its recent acquisitions have spurred growth, however the balance sheet is no longer debt-free.
While interest payments may be low, this could make further M&A activity much more difficult. As such, organic growth will be in the spotlight moving forward. The stock has suffered over the last six months, while the valuation edges closer to warranting a Buy rating.
Disclosure: At the time of publication, Bradley Guichard had a position in the securities mentioned in this article.
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