Gladiathor
I previously suggested that Magnite, Inc.’s (NASDAQ:MGNI) strong cash flows would eventually matter, and this has proven to be the case over the past three months, with the stock up around 40%. While the business continues to face headwinds, and competition remains a threat, Magnite’s growth is starting to pick up and its margins are recovering from elevated amortization expenses.
Even though the stock has been up significantly in recent months, Magnite still appears to be undervalued given its growth prospects and ability to generate free cash flow. As the company’s focus shifts from reducing net leverage to returning cash to shareholders, the valuation should continue to move higher.
CTV
After several soft quarters, Magnite’s CTV business appears to be stabilizing and is expected to return to YoY growth in the first quarter of 2024. The improvement in the CTV business has been attributed to the macro environment. Revenue mix was also a headwind in 2023, with Magnite’s revenue growth significantly trailing ad spend growth as a result. The mix shift is now becoming more favorable though, which is another tailwind.
Similar observations have been made by other players in the space. Roku, Inc. (ROKU) saw a solid rebound in video advertising in the fourth quarter, which is expected to persist in the first quarter. CPG, health and wellness, and telecom were areas of strength, while categories like financial services and insurance were relatively soft.
Longer-term, TV advertising is worth over 60 billion USD in the US alone, but there remains a large gap between viewership and ad spend as the market shifts towards streaming. Approximately 60% of viewing hours are now streaming but only 30% of ad dollars are on CTV. Magnite expects CTV to outperform for the foreseeable future, just based on the amount of inventory that is likely to become available.
The shift towards programmatic advertising in CTV could also be accelerating, as evidenced by Amazon.com, Inc.’s (AMZN) recent introduction of an ad-supported tier for Prime Video and Walmart Inc.’s (WMT) planned acquisition of VIZIO Holding Corp. (VZIO). Both of these companies can leverage their shopping businesses to support full-funnel advertising on CTV.
Amazon’s introduction of advertising in its streaming service will likely have important ramifications, as Prime Video has around 200 million subscribers. This should help incentivize advertisers to shift from linear TV, but in the near term, it will add to the oversupply of inventory. Amazon Prime’s CPMs are generally low, although there is a spectrum, and it is impacting market pricing.
Magnite should see some direct benefit from the introduction of advertising in Prime through the syndication of broadcaster and cable content, as Magnite’s broadcast and cable partners rely on it to monetize their share of this inventory. Magnite has stated that it has already seen a surge in partner inventory.
Magnite has also suggested that the technology capabilities (serving and targeting) that Amazon brings will force other companies to improve their offerings, and Magnite could help them do this.
Magnite offers a holistic CTV solution which it believes can improve monetization and efficiency. Advantages claimed by the company include:
- Complete solution – programmatic CTV ad server and streaming platform.
- Leading tools for sports and live advertising.
- Data and audience solutions.
- Direct buying through ClearLine.
- Independence.
Magnite also believes that ad serving creates a closer relationship with publishers. This is because SpringServe is embedded within client workflows and is an important part of their monetization strategy. Over three-quarters of Magnite’s streaming partners use both SpringServe and its SSP service, compared to less than 50% at the time of acquisition.
Magnite already has partnerships with many of the largest players in the industry, including Roku, Warner Bros, Paramount, Disney, LG, and Vizio. Partners are expanding their programmatic advertising efforts which Magnite expects to drive growth in coming years. Prime Video also recently introduced an ad-supported tier and there is a new sports partnership between ESPN, Fox, and Warner Bros Discovery, all of which are Magnite partners.
Live Sports
Magnite is also now suggesting that live sports are a large opportunity. In the past, sports advertising has been done by sellers directly, but Magnite believes that the shift to programmatic could provide it with an opportunity. The real-time nature of sports makes it naturally suited to programmatic advertising. This is a difficult technical program, though.
Magnite’s Live Sports Acceleration helps better monetize live inventory by increasing ad pod fill rates without impacting the user experience. Magnite already supports the NFL, NBA, MLB, NHL, the Olympics, Cricket, and World Cup Soccer.
DV+
Magnite’s DV+ business increased 10% YoY in the fourth quarter of 2023. This part of the business saw fairly stable growth in 2023 and doesn’t appear to be accelerating like the CTV business.
Magnite has suggested that AI is supporting DV+ growth, with the company using AI to filter the best impressions out of the more than one trillion ad requests per day.
Google plans on deprecating third-party cookies, which will further alter the digital advertising landscape. Magnite plans on supporting Privacy Sandbox as well as other leading alternative identity solutions. Magnite is also investing in its own audience capabilities to help publishers monetize their first-party data. While this move will be a headwind to the overall market, Magnite believes it could ultimately benefit, as competitors will struggle to support new third-party solutions and lack the scale to support first-party segment creation.
Financial Analysis
While Magnite’s revenue growth remains soft, it appears to have stabilized and is expected to pick up going forward. Total Contribution ex-TAC increased 6% YoY in the fourth quarter, to 165 million USD. Contribution ex-TAC attributable to CTV was 63.5 million USD, down 2% YoY. DV+ contribution ex-TAC increased 11% YoY, to 101.8 million USD.
Total ad spend was over 5 billion USD in 2023, up nearly 20% YoY, with CTV ad spend growing by more than 20%. Ad spend growth is expected to be higher in 2024 than the previous year, with Magnite gaining market share.
Table 1: Magnite Revenue Growth by Segment (source: Created by author using data from Magnite)
International growth is an area of strength at the moment, which Magnite has attributed to its DV+ business, publisher wins, and volume growth. From a vertical perspective, automotive, health and fitness, travel, and retail were areas of strength in the fourth quarter. Business services, home and garden, and financial services were relatively weak.
Magnite expects strong ad growth in 2024, particularly in CTV. Total Contribution ex-TAC growth for the full year is expected to be around 10%, with CTV growing faster than DV+. Total Contribution ex-TAC in the first quarter is expected to be 122-126 million USD, up approximately 7% YoY at the midpoint. Contribution ex-TAC for CTV is anticipated to be 49-51 million USD, an increase of roughly 8% YoY. Contribution ex-TAC for DV+ is expected to increase around 6% YoY, to 73-75 million USD. This guidance is likely somewhat conservative though, with US elections likely providing a meaningful tailwind. For example, political spend added 11 million USD contribution ex-TAC in 2020 and 2022. Magnite has stated that doubling this level would not be a bad expectation in 2024.
Figure 1: Magnite Revenue (source: Created by author using data from Magnite)
Magnite’s gross profit margins have begun to rebound in recent quarters as the impact of large amortization expenses wanes. This process is expected to continue throughout 2024 and 2025, leading to further margin gains. While this was completely expected, the improvement in profitability has probably contributed to Magnite’s share price rebound. Magnite’s underlying gross profit margin has also picked up in recent quarters, which is a positive given that its revenue growth continues to significantly trail ad spend growth.
Figure 2: Magnite Gross Profit Margin (source: Created by author using data from Magnite)
Figure 3: Magnite Amortization Schedule (source: Magnite)
Magnite’s operating profitability is also beginning to rebound, although still significantly trails cash flows. Magnite is guiding to a 1% adjusted EBITDA margin expansion in 2024. As a result, adjusted EBITDA growth should be in the double digits, with free cash flow growth somewhat higher. Total CapEx for 2024 is expected to be in the mid-40 million USD range, a significant step up from 2023, but still well below depreciation and amortization expenses.
Figure 4: Magnite Profitability (source: Created by author using data from Magnite)
Figure 5: Magnite Operating Expenses (source: Created by author using data from Magnite)
The balance sheet remains a focus area for Magnite, with recent activities increasing liquidity and reducing debt costs. Magnite has a new credit facility and repurchased 61 million USD of its convertible notes at a 13% discount in the fourth quarter. The board also approved a new 125 million USD stock and convertible note repurchase program.
Figure 6: Magnite Net Leverage (source: Magnite)
Conclusion
After a period of relative weakness, Magnite’s business appears to be picking up again. While the share price is up significantly off the 2023 lows, Magnite’s valuation remains low given the company’s ability to generate free cash flow. Some of this is likely due to ongoing investor skepticism in regard to the SSP business model.
SSPs have not really had a strong competitive position in the market. There are structural shifts occurring at the moment which could change this, but only time will tell. This makes an investment in companies like Magnite and PubMatic, Inc. (PUBM) risky, despite their low valuations and seemingly bright prospects.
Figure 7: Magnite Relative Valuation (source: Created by author using data from Magnite)
