Magnite’s Strong Q4 Overshadowed by Weak Guidance; $15.50 FVE

While Magnite’s MGNI share price increased more than 20% after we initiated coverage in December 2022, the stock’s 11% afterhours pullback in reaction to the firm’s light guidance has created an attractive entry point, in our opinion. Magnite reported strong fourth-quarter 2022 results, but its first-quarter and full-year 2023 guidance indicate that this year’s potential economic downturn will hurt ad spending growth more than we expected, especially on the connected TV side, which attracts more broad-based campaigns. However, we think partnerships with large media firms, such as Disney and Fox, and with additional streaming providers, like fubo TV, plus working more closely with demand-side platform providers position Magnite to benefit from an economic recovery that will drive strong growth in ad spending. With lower revenue growth projections, we reduced our fair valued estimate to $15.50 from $16.50.

Magnite reported fourth-quarter total revenue of $175.4 million, up 9% from last year driven by adoption of connected TV within programmatic ad spending. Revenue excluding traffic acquisition costs, or fees paid to ad sellers, was up 10%, with growth in connected TV (up 20%) and mobile (up 18%) partially offset by a decline in desktop (down 15%). Adjusted EBITDA margin dipped 7 percentage points to 41%—unsurprising given the higher costs associated with the development of the firm’s latest platform, Magnite Streaming, that is also fully integrated with SpotX, which Magnite acquired in 2021. Margins likely will remain under pressure in the short term due to additional costs of running the firm’s old platform and Magnite Streaming in parallel to help clients transition from the former to the latter. However, once Magnite Streaming scales and the firm returns to stronger top-line growth, which likely will begin in the second half of this year, and cost control efforts, such as the 6% reduction in head count, take hold, we expect margin expansion in 2024.