The Beauty of Taiwan

         Magnite: A Second Chance At Investing In A High Growth Industry

Summary
         Magnite is the world’s largest independent supply-side advertising platform which has been created from the merger between the Rubicon Project and Telaria.
         The Connected TV (CTV) platform is the portion of Magnite that is expected to lead the future growth of the company and the pandemic has significantly accelerated Connected TV.
         A recent short report by Spruce Point Capital Management claims there is excessive valuation due to poor risk vs reward.
         Magnite is a bet that over time the largest most sophisticated media publishers in the world will aggregate their ad inventory on to one supply-side advertising platform.
         Magnite is also a play on the economy recovering from the pandemic. I consider Magnite a buy for a diversified portfolio.



         What Magnite does is enable online ad auctions. Magnite aggregates ad inventory (ad spots) from thousands of publishers and makes it easier for the advertiser to find places where they can to place their advertisement with a media publisher. Magnite also makes sure that the publisher's advertising locations are high quality, meaning that the ad spaces are free of bots and fraud. Magnite is also a payment collector in the ad auction process. When an auction is consummated, Magnite receives money from the advertiser's Demand Side Platform (DSP) and Magnite takes a small slice (take rate) and gives the rest of the money to the publisher as a payment for the ad space by the advertiser. Magnite's take rate is currently where a majority of the company's revenue comes from.



Risks
         Magnite has several risks to the story. Some of those risks are short term like COVID. The pandemic made advertising spend turn negative during 2020 which greatly affected Magnite throughout last year. The secondary effect of COVID is that it hindered the relatively new software business. The only good thing that came from the pandemic is that it increased cord cutting, which should make the CTV advertising business look really good when the advertising business returns to normal. It looks like COVID vaccines should be widely available sometime this year and if the vaccines are effective in shutting down the spread of COVID, then Magnite should not have to deal with COVID headwinds much longer.

         One of the medium term risks to Magnite is that the ad industry is currently being forced to move away from third party cookies. Currently, Apple's Safari browser and Google's Chrome browser are in the process of eliminating third party cookies. Apple is also in the process of killing off the ability to track people through a device's IDFA. Investors perceive that these initiatives of killing off third party cookies and IDFA will harm Magnite. On the other hand, there is a belief among Magnite management that there is a fundamental shift going on in identity management that is turning from a third party cookie world to a first party publisher driven cookie world and that publishers won't be able to make that identity management shift to first party publisher cookies without a dominant independent SSP playing a leading role. Magnite plans on being that dominant independent SSP and believes that the elimination of third party cookies and IDFA will ultimately be a long term positive for programmatic advertising in general and Magnite, in specific. Currently, Magnite and The Trade Desk are aligning on a new standard called the Unified ID 2.0 initiative that is designed to promote transparency and consumer privacy in identity management.

         Another perceived medium term risk is that publishers can potentially decide that they want to eliminate paying Magnite's take rate on advertising auctions by trying to establish their own in-house SSP. Magnite's CEO, at the 23rd Annual Needham Growth Conference hosted by Laura Martin, has mentioned that publishers controlling their own ad inventory and auctioning with a company's own in-house sales team is already a reality. However, when media publishers decide to use their in-house sales team, the publishers discover that they are still in need of a partner that has the technology and expertise to connect an ad inventory to a DSP programmatically and Magnite often winds up being that partner. Magnite makes less of a take rate from simply being a facilitator to a publisher but currently there are no publishers that are looking to totally remove a company like Magnite from the programmatic process. I suspect that the reason why publishers won't totally bypass SSP companies is that no publisher wants to make huge investments outside their core competency by trying to build a SSP from scratch.

         The last risk that I will mention is valuation. Recently, Spruce Point Capital Management put out a short report claiming that Magnite faces a bunch of risks with one of the primary risks that they mention being excessive valuation due to poor risk vs reward. Spruce Point Capital Management claims that Magnite faces up to 25%-50% downside risk.

         As mentioned previously, among the reasons why some growth investors think that Magnite is overvalued, can be seen in the pro revenue growth numbers in the last earnings report. Investors thought the Q3 2020 revenue growth of 12% was very lackluster and critics of Magnite consider a valuation 12 P/S as being too high. The way that I view things is that Magnite had enormous headwinds from the pandemic that greatly impacted the company in 2020 and that revenue growth should re-accelerate over the course of 2021, as people vaccinate and the economy reopens.

         Secondly, I think Magnite is in a perfect position to fill a need that publishers have a great desire for, which is a dominant independent SSP and I believe Magnite will gain market share by becoming the go-to SSP for almost all of the largest media publishers. Magnite has already become the exclusive SSP for Hulu and all of Disney's media properties and I think that is only the beginning. I view Magnite as a consolidation play on the SSP side of the programmatic industry and I believe over the longer term that Magnite will establish much higher rates of revenue growth which will cause investors to revalue Magnite much higher.



         "Key upside value drivers of MGNI in 2021 (our view) include: a) a strong rebound in macro (GDP and digital ad) trends; b) rapid CTV growth; c) strong fundamental momentum; and d) multiple expansion potential.."
Source: Laura Martin



Conclusion
         Magnite is a simple calculation for me. Shorter term, Q2, Q3 and possibly Q4 numbers reflect the headwinds from the ongoing pandemic. Investors who invest now are counting on the pandemic subsiding over the course of 2021 with advertising growth rates also returning to normal over the course of the year. Magnite is a shorter-term play on the economy recovering from the pandemic.

         Longer term, Magnite is a bet that over time, the largest most sophisticated media publishers in the world will aggregate their ad inventory on to one SSP platform that can handle all of the publishers needs whether they are web based, video, audio, CTV or DOOH and that Magnite will be that platform. Publishers seem to want an independent player on the SSP side as a alternative to Google and Facebook, similar to the way advertisers wanted an independent player on the DSP side in The Trade Desk. Magnite is a moderate risk, turnaround and consolidation play. I consider Magnite a buy for a diversified portfolio.

~ data from Magnite: A Second Chance At Investing In A High Growth Industry