Magnite: Pre-Q3 Earnings View (NASDAQ:MGNI)

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It did what all ads are supposed to do: create an anxiety relievable by purchase.“― David Foster Wallace, Infinite Jest

Today, we put Magnite, Inc. (NASDAQ:MGNI) back in the spotlight for the first time since our initial article on it back in May of this year. Since then, this small cap company has posted second quarter numbers and third quarter results are on the near-term horizon. An updated analysis follows below.

Stock Chart

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Company Overview:

Magnite, Inc. is headquartered in the Big Apple and operates an independent sell-side advertising platform that offers applications and services for sellers of digital advertising inventory or publishers that own and operate CTV channels, applications, websites, and other digital media properties, to manage and monetize their inventory. Magnite also provides applications and services for buyers, including advertisers, agencies, agency trading desks, and demand side platforms to buy digital advertising inventory.

The birth of Magnite was the result of a merger between The Rubicon Project (RUBI) and Telaria (TLRA) in the spring of 2020. Magnite has since acquired both SpotX and SpringServe in the summer of 2021. These purchases made Magnite the largest Sell-Side Platform in connected TV of CTV, which is also known as streaming. The stock currently trades for around $7.50 a share and sports an approximate market capitalization of $975 million.

Second Quarter Results:

Q2 Highlights

August Company Presentation

On August 9th, the company posted its second quarter numbers. Magnite had a non-GAAP profit of 14 cents a share as sales rose nearly 23% on year-over-year basis to $123.3 million. This compares to non-GAAP earnings of 11 cents a share in the same period a year ago. Both top and bottom line results slightly missed expectations. Revenue attributable to CTV was $52.1 million. This was up 52% year-over-year. Sales growth rose 19% on a pro forma basis taking into consideration the acquisitions of SpotX and SpringServe.

Guidance

May Company Presentation

The company’s revenue ex-TAC mix for the quarter was 42% CTV, 36% mobile and 22% desktop. Results largely tracked guidance that management had laid out when it posted first quarter numbers in May.

Analyst Commentary & Balance Sheet:

After second quarter results came out, five analyst firms including RBC Capital and Needham reiterated Buy ratings on the stock. Two of these contained downward price target revisions. Price targets proffered ranged from $13 to $19 a share. Evercore ISI maintained its Hold rating MGNI and lowered its price target on the shares from $14 to $10.

Balance Sheet

August Company Overview

There has been no insider activity in the stock since our first article on the company in May. Approximately eight percent of the outstanding float in the shares is currently held short. The company ended the second quarter with just over $230 million of cash and marketable securities on the balance sheet versus $725 million of debt. The firm repurchased $4 million worth of its own shares during the quarter and still has $28 million left on an existing stock repurchase program. Magnite delivered $29.5 million worth of operating cash flow in the quarter and management continues to reduce the company’s net leverage.

Net Leverage

August Company Presentation

Verdict:

The current analyst firm consensus has the company earning 68 cents a share in FY2022 as revenues rise just over 20% on year-over-year basis. Almost 90 cents a share of profit is projected for FY2023 on sales growth of 15%.

Despite a difficult environment, Magnite seems to be executing decently. When we last visited the company, it was producing a bit over $20 million in quarterly cash flow. That now stands near $30 million and the company looks like it is on track to meet its goal of $100 million in operating cash flow in FY2022. This would give a stock just over 10% operating cash flow yield at current trading levels.

Leadership also should be commended for cutting its net leverage by more than half since the second quarter of 2022. One major concern investors should have in this space is declining spending on ads as economic growth has slowed markedly from 2021. This was the key reason Alphabet (GOOG) (GOOGL) recently missed expectations with its third quarter results.

Therefore, I am not adding to my holdings in Magnite until I see what impacts the slowdown in ad spending had on results in the third quarter. That said, with the shares selling at approximately 10 times this year’s projected earnings, I have no problem maintaining my small ‘watch item‘ holding in MGNI via covered call orders until we see updated data points next week.

It is important to bear in mind that political campaigns are designed by the same people who sell toothpaste and cars.”― Noam Chomsky

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