Summary

Magnite’s Q3 results were solid, but its guidance for Q4 left investors flummoxed.

Magnite’s CTV is the crown jewel here, and that’s only expected to be up 23% y/y for Q4.

Presently, investors are throwing in the towel, without being willing to consider its valuation. But at some point, investors will return to consider its valuation.

Magnite is priced at 6x its 2022 revenues, while its EBITDA margins are pointing to 35% to 40% for 2022.

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AlexSecret/iStock via Getty Images Investment Thesis

Magnite ( MGNI ) puts out strong Q3 results but the stock tanked as its Q4 guidance points to middle-of-the-road growth rates for its CTV segment.

Specifically, investors didn’t take the news that CTV revenues are only expected to be up 23% y/y during Q4 all that well.

Nevertheless, Magnite is still pointing to grow its top line by 25% CAGR into 2022 on a proforma basis. Paying 6x next year’s revenues, for a profitable company is a cheap valuation. A Very Tough Year With Magnite

Data by YCharts Few investors would have been able to withstand the immense selling pressure Magnite’s has faced this year.

Looking back to 2020, Magnite was a company that could do no wrong, and investors were clamoring relentlessly for the stock. Hence, starting December 2020, all the way through April, I wrote bearish articles on this name, here .

But starting May 2021, I believed that investors were being too pessimistic , and I turned bullish. As it often happens in value investing, I was too early calling the bottom here, and the stock has sold off further. Here’s why: Revenue Growth Rates Are Choppy

Source: author’s calculations; **company guidance (traffic acquisition costs estimated by author)

Magnite’s growth rates are incredibly volatile. That’s a theme that’s particularly noticeable looking out to its Q4 2021 guidance. The guidance that I’ve used for Q4 2021 above, assumes approximately 14% in traffic acquisition costs.

Hence, I’ve adjusted the guidance out for Q4 2021, to make the figure ”gross revenues” and more comparable with other periods. Hence, the guidance is slightly different from the 73% y/y you may have seen elsewhere.

As a reminder, historically, prior to SpotX’s acquisition, less than 3% of Magnite’s revenues were reported on a gross basis. Whereas now close to 20% of Magnite’s revenues are reported on a gross basis. (Source)

Next, as you know, Magnite has been on an incredible acquisitive path since April 2021. Thus, the bulk of its growth rates are inorganic, and Q3 2021 only saw 26% y/y of organic growth.

This is down substantially from the 79% y/y of pro-forma growth rate that investors witnessed in Q2 2021 . Thus, why such a large gap between Q2’s and Q3’s pro-forma growth rates?Think about the quarters that Magnite is lapping. For Q2 2021, it was lapping a period where the ad industry all but when into a slump, while for Q3 2021 Magnite’s lapping a period where the ad industry started to see a rebound. Industry Peers All Point Down Data by YCharts The graph above is a bit messy given that all companies have reported on different days, but the general trend is pretty consistent. From Snap ( SNAP ) to Roku ( ROKU ) and others too, all these stocks have fallen out of the sky. Why?It appears that investors were hoping that the growth rates that these ad companies put out in Q2 were the ”new normal”. Whereas, in fact, if anything, Q3 is a closer approximation of the ”new normal”.You may remark that Snap’s issues were down to privacy and IDFA changes and ad-measuring, while Roku is mostly down to its hardware and its supply chain issues . However, I would push back those nuances are a distraction from the overall consideration that’s facing investors here.What investors crave above all else is confidence, consistency, and predictability. But these choppy growth rates simply don’t offer investors any of that.Presently, investors find themselves in limbo thinking about how 2022 will shape up for these companies. Perhaps the bears were right all along? Were Bears Right? Bears had been making the case for some time, that as restrictions ease and these companies start to lap their strong growth rates from earlier in 2021, that 2022 will be seeing these companies as not growing at such a fast rate after all. Source: author’s calculations, high-end […]

source Magnite: CTV Slows Down Slightly And Investors Throw In The Towel

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