Magnite - Summary report
Hello,
Today I will describe a company that operates in an ever-innovative space: advertising. More precisely, a company that operates in the field of programmatic advertising (the process of purchasing ad space using software).
I think this industry is and will always be extremely important and any retail investor should consider a degree of exposure. The company is called Magnite Inc. (“Magnite” or “the company”), ticker symbol “MGNI”.
The only thing more impressive than the sector is the colossal number of abbreviations and acronyms that this sector utilizes, so I apologize if it seems like my ideas might lack some clarity at times.
Magnite was born in 2019 after advertising technology company The Rubicon Project merged with Telaria, a leading provider of CTV (connected television) advertising. Following the merger, Magnite became the largest independent omnichannel Sell-Side Platform (SSP). It facilitates buying and selling advertisement inventory across all channels (CTV, mobile apps, audio etc).
Magnite offers a platform that features applications and services for digital advertising inventory sellers, called publishers (websites, mobile applications and other digital media properties) in order to sell their advertising inventory to the buyers (advertisers, agencies, agency trading desks, and demand side platforms, or DSPs), creating a marketplace over which such transactions are executed.
Together, these features power and enhance a comprehensive, transparent, independent advertising marketplace that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the advertising inventory.
“We provide software that enables publishers across all media including CTV, video, audio & display to maximize revenue via programmatic trading” – Investors presentation 2020
1. Investment thesis
Magnite is well positioned in an evolving and fragmented sector. The main grounds for solid future growth are:
a) The shift from linear TV to programmatic ads is happening
Magnite expects CTV to become its biggest growth driver. As streaming video is gaining more traction (around 80% of the households in the US have CTV) and cord-cutting intensifies (by 2024 the non-pay TV households are expected to surpass pay TV), Magnite is prone to benefit since more brand advertisers will shift their focus towards CTV.
b) CTV independent leader with a strong focus on expanding globally
After the Telaria merger, Magnite became well positioned to benefit from the switch towards CTV. Their platform has been strategically built to meet the unique requirements of CTV sellers. In addition, their recent acquisition of SpotX reinforced this objective and cemented Magnite as a CTV leader. Being an independent company is crucial since generally companies are looking for a 3rd party outside of Google or Facebook to manage their ad inventory.
c) Supply path optimization
Supply path optimization or SPO translates into a consolidation, working with fewer partners while having a stronger relationship with them. As a SSP leader Magnite can leverage its position to strengthen its relationship with the biggest advertisers. Just as The Trade Desk did on the buy side when it differentiated itself as a strong independent DSP in a very fragmented market, the same opportunity arises for Magnite on the sell side.
2. The industry
Nowadays both advertising buyers and sellers are demanding more transparency, better controls and more relevant insights from their advertising inventory purchases and sales. This has created a need for software solutions, known as programmatic advertising, that automate the process for planning, buying, selling and measuring digital advertising across screens. In this process there are two parties involved: publishers and advertisers.
There are 3 tools used to orchestrate the online display advertising market:
1. Ad server, which acts as the publisher’s inventory management system and helps the publisher sell its inventory;
2. the marketplaces that match buyers and sellers of display ads (exchanges and networks, separately);
3. Ad buying tools that advertisers must use as their middleman to buy display inventory from exchanges;
1. Publishers’ Inventory Management Systems (Ad Servers)
Large publishers such as CBS, Time, ESPN, Weather.com, and NPR depend on a sophisticated inventory management system called an ad server to manage their online display inventory and to help them navigate the complexities of electronic trading. The Ad server is used to maximize the publisher’s revenue. They do so by serving two main functions:
- Identifying the users visiting the publisher’s webpage (on behalf of and with the permission of the publisher) in order to manage the publisher’s inventory and maximize its yield - done through identification technology facilitated by the user’s web browser (e.g., Chrome or Safari) and/or mobile device (e.g., Android or iOS)
- connecting with multiple marketplaces (Ad Exchanges) to help publishers sell their inventory.
Google completely controls the publisher ad server market for display inventory through its product called Google Ad Manager (GAM). GAM controls over 90% of this product market in the United States. Essentially every major website (e.g., USA Today, ESPN, CBS, Time etc) use GAM. As a result, GAM, as the middleman between publishers and exchanges, has a great amount of power the market.
Ad server can obstruct competition between the multiple exchanges competing for publishers’ impressions in multiple ways (ex: the Ad server might interfere with a publisher’s ability to share full information with exchanges).
2. Electronic Marketplaces for Display Advertising: Ad Exchanges (for big publishers) and Ad Networks (for small publishers)
Ad exchanges for display ads are real time auction marketplaces that match multiple buyers and multiple sellers on an impression-by-impression basis.
SSPs are also referred to as Ad exchanges (although SSPs and ad exchanges were developed separately in the Programmatic ecosystem, nowadays, from the Publishers’ perspective, they are almost the same entities).
Google owns and operates the largest display advertising exchange in the United States, called the Google Ad Exchange or “AdX”. Because of its dominant position, it is believed that Google’s exchange charges publishers double to quadruple the prices of its nearest exchange competitors.
By controlling publishers’ inventory through its ad server and simultaneously operating the largest advertising exchange, Google has inherent conflicts of interest between publishers’ best interests and its own.
3. Ad buying tools for Large and Small Advertisers
Large advertisers use ad buying tools called demand-side platforms (“DSPs”). Ad buying tools let advertisers set parameters related to their purchasing decisions, including details about the users they wish to target and the maximum bids they are willing to submit and pay for particular types of display inventory.
We can conclude that Google holds a strong position at each stage of the intermediation chain, particularly as a publisher ad server.
As a result, advertisers and publishers may face a lack of transparency over aspects like quality and effectiveness of advertising, the way auctions are carried out and the prices are determined or the remuneration of the intermediaries. Intermediaries are capturing at least 35% of the value from the open display channels.
The solution for the major position that Google has in the market is the adoption of independent advertising platforms. During the recent years, many platforms have seen important growth both on the sell side and the buy side.
Real-time bidding (RTB) process
When a user visits a publisher’s website, the ad server can send the publisher’s available impressions to exchanges along with information about the impression, including the user ID, the parameters of the ad slot, and any rules about pricing.
Each exchange then sends a “bid request” to the ad buying tools who have a “seat” to bid in the exchange and act as advertisers’ middlemen. After the set time, each exchange closes its auction, excludes late bids, and chooses a winner. The publisher’s ad server then selects the winning advertisement associated with the highest exchange bid and returns it on the user’s page before the page has even finished loading.
Header Bidding Process
There are 2 ways in which the programmatic ad buying can be done via real-time biding (RTB):
Waterfall method – used mostly before 2016; publishers sale their ad space to the highest bidder in a cascading fashion; usually the premium placements were reserved strictly for direct deals and only the second-tier placements would get into a bidding process.
Header bidding - everybody bids at the same time for all the placements. This can earn publishers more revenue while also giving all advertisers an equal shot at high quality placements.
Although the header bidding process has been a breath of fresh air for the industry, it became very difficult to manage. As a result, Magnite (Rubicon at the time) together with other industry peers have come with the idea of an open-source community where each company could share any developments they make for this process.
That’s how Prebid.org was born. It is an independent organization that aims to promote fair, transparent, and efficient header bidding. It allows publishers to focus on maximizing their revenues without having to worry about integrations, data analysis or technical limitations and comes as a response to Google’s domination in the space.
The advertising market trends
2.1 OTT vs CTV
Digital advertising is used as a modern way to reach viewers that are outside of the traditional linear TV. That’s where OTT and CTV come into play.
OTT (“over the top”) refers to video content streamed via the internet instead of accessed with traditional cable or satellite TV – ex: Netflix, Hulu, Disney+.
CTV (or “connected TV”) refers to the viewing of digital content on internet connected televisions, including through stand-alone streaming devices, gaming consoles and smart TV operating systems. CTV has some meaningful benefits like superior targeting, measurable results and a growing audience – ex: Roku, Apple TV, Firestick etc.
3.2 Convergence of TV and Digital
Consumers are rapidly shifting their viewing habits towards digital mediums and expect to be able to consume content seamlessly across multiple devices, including computers, tablets, smartphones, and CTVs. As digital content consumption continues to proliferate, Magnite estimates that the percentage of advertising dollars spent through digital channels will continue to grow.
CTV viewership is growing rapidly and the pace of adoption is accelerating the transition of linear television to CTV programming. According to a November 2020 poll conducted by the Interactive Advertising Bureau, approximately 60% of US advertisers planned to shift ad dollars from linear TV to either CTV or OTT in 2021.
eMarketer forecasted that advertisers will spent around $11.36 billion on CTV ads in 2021, a 40% growth compared with 2020. This is just a fraction of the total $81.58 billion spent on digital display ad in 2021. The adoption of CTV has disrupted the traditional linear TV distribution model, as eMarketer estimates that approximately 31.2 million U.S. households have "cut-the-cord" (i.e., canceled a pay TV service and continued without it) as of the end of 2020, and this number is expected to increase to close to 50% of all U.S. households by the end of 2024. This disruption has created new options for consumers and new economic opportunities for content sellers to compete with traditional linear TV.
2.3 Private marketplace (PMP) vs Open market place (OMP)
Although an open auction bidding (or open market place) seems to offer many benefits and equal opportunities for the advertisers, it also comes with some drawbacks, like potential for fraud or an inability for the publishers to inspect the ads that are being offered to the consumer.
For instance, mobile in-app inventory remains relatively prone to fraud due to challenges in detection and in-app measurement. In 2019 emarketer estimates around $42 billion have been lost worldwide due to ad spending fraud.
In order to mitigate this risk, a private marketplace (PMP) has been used as a reliable solution during the last couple of years. A PMP is a digital marketplace where advertising is bought and sold programmatically between exclusive parties via a direct sale of premium inventory to an advertiser.
Magnite is continually investing into improving the PMPs that it operates. Currently, the majority of CTV transactions are executed through PMPs and the company expects PMPs to remain the main way in which CTV ads are negociated. In Q4 2020 earnings call, Magnite’s CEO said:
“The content producers are way too protective of their inventory, and the consumer experience to have an ad that runs - that does not fit with that programming or the vibe of the programming. So we do not see - we do not advocate an open world, it's all going to be private marketplace deals. They'll all go over programmatic rails, but it won't be this open bidding that you see that is developed on the display side.”
2.4 Supply Path Optimization (“SPO”)
Within the open marketplace (OPM), the publishers are trying to identify as many potential buyers as possible in the form of agencies or DSPs. The header bidding process has created the opportunity for the publishers to work with as many SSPs as they want to, which pretty much led to the disappearance of the exclusive inventory in the open marketplace. This process has created an increasing number of intermediaries while the supply of advertising space remained the same.
Following the surging number of intermediaries, as per a 2018 eMarketer survey, it looks like up to 40% of the transacted amount on the exchanges represents a tech charge that the header bidding process creates, which leads to a significant decrease for publishers’ revenue.
As a reaction to the surging number of intermediaries, the process of supply path optimization (“SPO”) was born. Supply Path Optimization refers to efforts by buyers to consolidate the number of vendors with which they work to find the most effective and cost-efficient paths to procure media (DSPs narrow the number of SSPs they want to interact with).
Magnite has recognized this as an opportunity to capture market share and increase the volume of advertising spend on their platform. Acting as the biggest independent sell-side platform in the world, the company anticipates SPO will be the prominent way in which CTV advertising will be transacted in the future.
3. The company
In April 2020 Telaria and Rubicon Project merged to become the largest independent SSP. Now the formed company, Magnite, runs our two distinct platforms: the old Telaria platform is now called “Magnite CTV” and it is specifically optimized for CTV, while The Rubicon Project platform is now called “Magnite DV+” where DV+ stands for display, video, and other formats such as native, audio, and DOOH.
The company has a wide offering:
The Ad server is the most important one. Here the decision to accept the highest bid is made on behalf of the publisher – Magnite’s newest acquisition: its Ad server, Spring Serve, bought for $31 million.
Moreover, Magnite acts as an omnichannel with important roles in the Programmatic decisioning, using its proprietary tool called Demand Manager. It has been created using Prebid’s Open-Source software for header bidding.
Demand Manager is integrated with Magnite’s exchange and supports open auction or private deals for the publishers. It is effectively sourced by utilizing first-party data from publishers and this would be expected to grow given IDFA in the future elimination of cookies and Chrome.
There are over 200 signed customers that use Demand Manager and the requests for Demand Manager represent over 20% of the total activity for Prebid.com.
Are cookies a thing of the past?
Despite the pending death of the third-party cookies (which has been now postponed to 2023), targeted advertising isn’t going anywhere. Instead, it’s quickly shifting from an identity model powered by buyers to one enabled by publishers and powered by global SSPs like Magnite.
Of the proposed alternatives, the vast majority of lean heavily on first party identifiers implemented by publishers, not buyers. Because publishers have direct relationship with consumers, they are best positioned to obtain user consent for implementing first party identifiers trough a login. For this publisher centric identity model to work effectively across massive volumes of sites and consumers, the industry requires sell side infrastructure and tools.
Sellers and Buyers tools – empower sellers to better monetize their space and buyers to efficiently target their desired audience.
How Magnite makes money
The company generates revenue from the purchase and sale of digital advertising inventory through its platform. Its take rate tends to be lower for PMP transactions compared to open auction, and tends to be lower on CTV transactions compared to other channels. It also generates revenue from the fee it charges clients for use of Demand Manager header-bidding product and Spring Serve Ad server.
Growth opportunities
Magnite anticipates that most of the ad inventory available in the CTV space will be managed trough reserve auctions, which creates an immense opportunity for consolidating its position as the preferred SSP for the big companies using CTV advertising.
3.1 SpotX acquisition
Magnite recognized the potential in the CTV market and made significant efforts to get a head start. More specifically, the company chose to grow quickly, by acquiring a CTV-focused company like SpotX. Following this acquisition, Magnite is the world’s largest independent SSP in CTV while also getting instant access to customers like Roku, Samsung or ViacomCBS.
Given the fact that in Q2 2021 the revenue from CTV was only around 20% (without the revenue from SpotX), Magnite’s move makes sense considering the future growth rate expected for CTV spending.
The price of the acquisition was $1.17 billion; SpotX's net revenue for 2020 was $116 million, $67 million of which was CTV-related, which gives a P/S around 10 that Magnite paid for SpotX. This seems to be a reasonable price giving the fact that SpotX had adequate growth rates (over 40% revenue growth year-over-year for CTV) and ~30% adjusted EBITDA margin for 2020.
As there is the case with most acquisitions, whether it turns out to be a good value acquisition won’t be clear in the immediate future, but given the experience that management gained during the integration of Telaria and Rubicon Project (that was completed during the pandemic), seems like the odds are in their favor.
This is a move aimed at consolidating Magnite’s position as an independent market leader in the SSP space. Here’s a list of some of the most popular SSPs amongst publishers from a survey realized by Statista in 2020:
However, the company decided to use debt as a way of financing part of the merger, which always carries with it the risk of default. Issuing a $389 million convertible senior note on top of another $360 million loan increased the long-term debt with around $750 million in a short time span.
4. Management team
In March of 2017 Michael Barrett became the CEO and chairman of Magnite, replacing Frank Addante, the founder and chairman at the time. Before joining Magnite, Barrett was the CEO of a leading independent mobile marketplace that was acquired by Verizon in 2015. With a solid background in the advertising industry, Michael Barrett seems to have done a great job of growing the company, either organically or via strategic mergers.
5. Risks
Integration difficulties – every merger, especially a large one like it is the case with Magnite and SpotX presents unique challenges. Integrating SpotX successfully can be a hurdle for Magnite and it will be a major factor in capturing the momentum that the industry has in CTV. However, given its recent experience with the integration of Telaria, Magnite’s management seems to be well prepared to combine these two companies seamlessly.
High amount of debt (~$750 million), which carries the risk for default
Intense competition in a fragmented market – there is a significant number of players in this market, especially big established players like Google, Facebook or Comcast that have the resources to impact the landscape in a major way.
“The vast majority of the revenue dominating this space right now is by FreeWheel (owned by Comcast) and Google. And that’s we’re going after. This isn’t a defensive move by us to maintain what we have, but it is about expansion opportunities to get business that is already there in the hands of the non-independent, more walled garden guys” - Michael Barrett, Q2 2021 Earnings Report
6 Financials
6.1 Revenue and gross margin
As we can see, Magnite had a difficult period in 2017 and 2018, experiencing negative revenue growth, mostly because of its inability to adapt to the new trend of the industry. Things changed once the management team was replaced and revenue grew steadily starting with 2018, growing by 25% in 2019 and by 42% in 2020. Gross margin followed the trend and got back to the 64% level for 2019 and 2020. The 2020 revenue doesn’t include the revenue for Telaria for Q1.
Adjusted EBITDA, a non-GAAP metric used to showcase the ongoing activity of the core business has seen a great trend in the last years. Moreover, the company expects adjusted EBITDA margin to be between 30% and 35% in 2021, compared with 19% for 2020. Still, the company didn’t manage to attain net profitability yet.
Revenue has grown with 120% in the first 9 months of 2021, mostly because of the CTV segment:
In terms of channel, only 15% of Magnite’s revenue came from CTV in 2020. This will change as the company integrates SpotX while also growing its own CTV exposure. Around 70% of Magnite’s revenue comes from the United States, while 30% is from international traffic.
Although this isn’t organic growth, Magnite expects it to create organic growth in the following years and it has reiterated its revenue guidance for 2022 at over $500 million.
In terms of channel, for the first 9 months of 2021, 38% of revenue came from CTV, growing from 15% at the end of 2020. Around 77% of Magnite’s revenue comes from the United States, while 23% is from international traffic.
6.2 COVID-19 impact
Magnite depends on the overall demand for advertising and on the economic health of our current and prospective sellers and buyers. In response to the pandemic, a significant number of advertisers reduced their advertising budgets, resulting in an overall decrease in advertising spend through the company’s platform compared to the pre-COVID period.
However, Magnite’s revenue trends improved significantly during the third and fourth quarters of 2020 as the company’s revenue returned to positive growth. The company delivered two strong quarters for Q3 and Q4 of 2020, mostly because the unexpected resilience of digital ad spending in 2020. The sector managed to grow at ~12.7% compared to 2019 while for 2021 a 20% growth is expected for digital ad spending.
Furthermore, the company improved its 2021 estimates for long-term revenue growth (from 20% to 25%) as well as for adjusted EBITDA margin (between 30% and 35%). These alterations are based on the future growth prospects for the CTV segment.
Q3 2021 impact and Q4 2021 guidance:
The concerns regarding the global supply chains and disruptions will continue to have an impact in the fourth quarter, more precisely in the auto sector.
One of the largest regional advertisers are the big rooftop car dealerships that enjoy CTV advertising immensely. However, the sector is seriously affected by supply chain issues and hence they have a much smaller advertising inventory to sell. Another sector that might have a smaller impact is traveling and regional tourism that is also slightly affected by the pandemic.
6.3 Cash flow
As we can see from below, the cash flow from operations was negative at the end of 2020, mostly because of the timing of and fluctuations in receipts from buyers and related payments to sellers, which influenced the working capital. It was quickly reversed in the first 9 months of 2021:
However, please note that for the investing activities the company has increased its debt, around $400 million in Senior Notes and $350 million in debt. As a result, its debt balance sits around $720 million. The company chose this method of financing its acquisitions in order to protect investors from dilution, but we must keep in mind that debt carries a risk of default if the amount surges uncontrollably.
7. Valuation and technical
7.1 Valuation
Competition is very intense in the space. Besides the big, established players like Google, Facebook or Comcast, there are also some smaller SSPs that are expecting significant growth in the next couple of years (ex: Pubmatic, Perion etc).
I’ve compiled a scatterplot to see how exactly these companies compare to Magnite in terms of Next twelve months Enterprise Value / Revenue and Revenue Compounded Annual Growth rate for 2020-2023:
As we can see above, Magnite is trading around the trend-line, which means it is trading at a fair valuation compared to its peers when the two metrics are considered. We can see that Magnite is expected to have the fastest growth without trading at a big premium.
Moreover, we can see more companies like Pubmatic (~$150 million in revenue in 2020) that are fast growing within the space and currently trade at a premium. We also have firms like Perion, which is expected to grow its revenue by ~27% in the next 3 years and is trading under 2 NTM EV/Revenue, which is a big discount when considering its peers.
These are companies that are similar to Magnite. I’ve left out the big players like Google, Facebook or Comcast since their advertising revenue segment is difficult to isolate.
7.2 Technical
This is the part that’s very much independent of the company’s growth. Magnite is a growth company hence it is highly susceptible to the economics of the market and more precisely the valuations trends.
While many of the growth stocks have experienced significant pullbacks in the last couple of months, the market is still at an all-time high so I would be careful when initiating positions. It is possible that another pullback will follow hence we need to make sure we are protected.
During 2020 Magnite’s stock price has experienced a colossal growth. Its rebound in Q3 and Q4 in corroboration with industry’s trend have led to a 260% return for full year 2020. Since then, the stock hit an all-time high around $62 and then had a massive pullback back to $25. That’s a 60% drop in the recent months.
At this time, it seems like Magnite seems to have pulled back to a reasonable valuation. For instance, if we use Enterprise Value divided by Next Twelve Months Revenue, the ratio is lower than its mean, perhaps indicating a decent time for acquiring shares without the risk of overpaying.
On the weekly chart we can see that the $20 price has acted as resistance in the past. Usually, there is a chance that a price level that has acted as a resistance in the past will act as a support. This is not a certainty, but it may happen if the price comes back to the $20 area.
On the daily chart, we can see that the $24 level has acted as a strong support in the past (green arrows). A support area is an area where the price will usually bounce because the demand for the stock will be bigger than the supply, which will lead to an increase in the price.
Now the price has closed under the $24 mark and this already acted as a resistance (red arrow). This means that the price will be rejected once it hits that mark and this might also happen in the future. The company might need a catalyst in order to jump above the resistance and above the big red trendline that is keeping the price down.
I would usually not encourage anyone to buy stocks that are in a downtrend, but the company is still in a long-term uptrend. It might consolidate between the 20 and 24 area for a couple of weeks and that might be a good place to slowly build a position.
My plan is to be very careful. We may still be due a correction in the market and this will inevitably drive the price lower, independent of the business’s performance.
Conclusion
To sum up, Magnite seems to be offering great exposure to the growing advertising industry. Looking to benefit from the migration from linear tv advertising towards digital advertising, Magnite might be very well positioned to benefit from this paradigm shift.
The company seems to be very aware of its shortcomings and is actively trying to fix those either organically or via strategic acquisitions. Its objective is to establish itself as the largest independent omnichannel Sell-Side Platform and so far it seems like they are on the right path.
Remember to watch the business and the potential catalysts that might affect the investment thesis and try to ignore the short-term noise in the market.
Disclosure: The article only expresses my opinion and it is NOT investment advice. Please do your own due diligence and pick companies that have your desired level of risk