Magnite, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Magnite Inc. is a sell-side advertising technology platform that provides solutions to automate the purchase and sale of digital advertising inventory for CTV and other digital media.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Magnite, Inc. (MGNI) operates as a sell-side advertising platform in the digital advertising landscape. Their primary function is to provide technology solutions that allow publishers of digital content, like websites, mobile apps, and connected television (CTV), to manage, sell, and monetize their ad inventory. In simpler terms, they help content creators to earn revenue by managing the advertising space on their platforms and selling it to advertisers.

  • Revenue Distribution:
    • CTV: Magnite has been focusing on connected TV (CTV), a rapidly growing area, and it has become a key driver of their growth. It is important to note, however, the shift from traditional TV to online streaming, as that is a key player for why CTV revenues are growing.
  • Revenue from CTV was approximately 41% of total revenue in 2022 and has continued to grow rapidly. In the last earnings calls the CFO is quoted that in the latest quarter, they saw CTV revenue grow by 35% compared to the same period of last year. * Display and Other: This encompasses their traditional advertising formats like display ads and mobile. Though their focus is rapidly shifting to CTV, display ads are still a major component of their overall revenue.
  • Trends in the Industry:
    • The advertising industry is undergoing a rapid transformation towards digital channels, with a significant shift towards programmatic buying (automated purchasing of ads).
    • The rise of CTV is changing where consumers are watching television and how they are consuming content. * The death of the third party cookies has created an increased interest from advertisers to target their ads in the best way.
  • As of July 2023, total digital advertising spending will increase from $628 billion in 2023 to almost $800 billion in 2026. This indicates the increasing significance of the digital advertising industry for growth in the future.
  • There has been a big decrease in the prices of the digital advertising inventory, in general, since the middle of 2022 (the prices have come down for companies on the sell-side and the buy-side). Also, the macro economic factors have negatively affected advertisement spending, because companies have less money to spend. This has all affected revenue in the industry and can be seen in the numbers of all companies in this space. * This has also contributed to a consolidation within this industry
  • Margins:

    • As a software company, Magnite has relatively high gross margins in the 60-70% range. However, those are not the margins the company is taking, since they need to give to the company that is actually buying the ads. This is because Magnite is the “sell-side” platform.

    • However, the overall net income margin is low due to sales and marketing costs and research and development spend.

  • Competitive Landscape:
  • The ad-tech industry is crowded with many competitors, like Google, The Trade Desk, PubMatic, and various smaller firms that could be a major threat for new entrants. It can also make it more difficult for a company to gain and maintain market share. * There is also a trend where the companies on the buy-side and the sell-side can merge, giving them greater power over the market.
  • What Makes MGNI Different? * MGNI has more of its revenue coming from the high-growth segment of CTV. The competitors are trying to compete with it but are behind in market share and revenue. * While the ad-tech market overall suffers, they are managing to maintain its revenues in a good pace.
  • The company is trying to implement AI, and Machine Learning into their product. The CEO even mentioned that the clients with the highest AI adoption saw a 30% increase in spending, compared to the average growth of only 1%.
  • The company is focusing on “supply path optimization” where they work to get the most premium and efficient offers for publishers by decreasing the number of intermediaries.

Financials:

  • Balance Sheet: MGNI maintains a decent balance sheet, which will give it good ability to adapt to changes in the business. The company has more assets than liabilities. * Cash: There is over $150M in cash and short term investments, and approximately $96 million in long term investments.
    • The company had some debt, approximately $580M in 2022 but they are paying it down. * Revenues: Despite the difficult macroeconomic situation, revenue growth has been at an acceptable rate.
    • In the latest quarter report, they have surpassed estimates in revenues but still saw the total revenue be slightly less than the same period last year.
  • Profitability: MGNI has relatively high gross profits, but the amount they are earning is minimal after sales, marketing, research, and development.
  • Guidance The guidance of the next quarter is not very good. The revenue is expected to be down, and the company has reduced its guidance for revenues and profits in the rest of the year.
  • It is also worth noting, they are predicting for the second half of 2023 the operating expenses to be around $20 - $30 million, while in the first half it was $42 million.
  • Controversies: * The management team has been accused of being way too optimistic, which has led to some analysts losing confidence in its leadership.
    • This has been reflected on multiple downgrades from financial institutions.

Moat Rating: 2/5

  • Justification: MGNI has a narrow moat, which is based on network effects (mainly the supply side - they have over 25,000 supply partners) and switching costs. This comes from their strong market position within the digital advertising market and their focus on CTV. However, there is great competition, and if the company does not keep up with innovation and changes to the market, it might become more and more vulnerable. The company is working on implementing more AI into their product, which might help in strengthening the moat.

Risks to the Moat:

  • Intense Competition: The digital advertising landscape is highly competitive with many large players including Google and The Trade Desk and others who might offer better solutions or better value. This intensifies the pressure to innovate and maintain market share.
  • Changing Customer Preferences: The need for data privacy may change how advertisements are targeted in the future. This could also result in a decrease in their business in the future.
  • As discussed before, the death of the third-party cookies is something the entire industry is facing. The companies that react fastest and are best at handling this will come out on top.
  • Reliance on Technology: A fast changing technology environment might make existing solutions become obsolete. Companies in this industry needs to spend a lot on research and development to stay on top.
  • Macroeconomic Factors: The macroeconomic environment may affect the revenue from advertising. For instance, in a recession, companies will limit their marketing spend, decreasing advertisement volume.

Business Resilience:

  • MGNI has established long standing relations with many big players in the market.
  • The company has been able to show it can maintain its business even if the market is suffering.
  • The company has good balance sheet to weather the storm.

Understandability Rating: 3 / 5

  • Justification: Understanding the core business model of MGNI is relatively straightforward—it’s a platform connecting ad sellers (publishers) and ad buyers (advertisers).
  • However, it’s difficult for someone who is not in the industry to fully understand the nuances of the industry, such as different valuation methods and what affects them, and the various tech solutions involved in their product.

Balance Sheet Health Rating: 4 / 5

  • Justification: MGNI’s balance sheet is mostly healthy, with more assets than liabilities, and their current assets outweigh their liabilities. Their debt is not very small, but the company is working to pay it off.
  • The amount of debt that is is slightly concerning, but there is a plan to pay it off.