Magnite Memo and Intellicheck Earnings Idea

 As a part of Berkeley Investment Group, I sometimes pitch ideas into the fund and the process starts with a memo, Thought I would share 

Investment Memo

Company: Magnite

Industry: Digital Advertising

Ticker: MGNI

Market Cap: 1.026 Billion

TTM P/E: N/A

Share Price: 9.31

TTM P/S: 5.5x

52 week low & 52 week high: 13.11/4.09

TTM P/FCF: 30.72x

Net Debt/TTM EBITDA: N/A

TTM EV/EBITDA: N/A

TTM EBIT/Interest Expense:N/A

TTM Revenue Growth: 16.5%

TTM EPS Growth: N/A

NTM Consensus Revenue: $201.2 M

NTM Consensus EPS: 

 

Business Description

·       Magnite operates a supply-side(or sell-side) ad platform for a variety of industries.  Magnite is the result of a merger between two companies: Telaria and The Rubicon Project. Telaria was a supply side provider for Connected TV and the Rubicon Project was a Supply-Side platform for desktop and mobile advertising.They are the largest independent supply side provider. They are contracted by ad publishers and used to sell advertising in an automated fashion. On the other side are demand side platforms that are used by advertisers to buy ads. SSPs are designed to maximize the prices at which the ad sells for. The SSP can be thought of as the marketplace seller of ad space used by publishers to maximize dolla bills for their ad space. Marketers often don’t want to have to negotiate with physical salespeople to find ad prices, thus SSPs automate this process. SSPs also help publishers control their inventory of ads. The most notable customer for MGNI is Hulu and Disney which runs ads through a personalized MGNI SSP


Industry Overview

There are 3 important parts to their industry overview: The rise of digital advertising(namely CTV), their competitors, and the importance of SSPs. There is a continued shift towards Digital Advertising, Mobile Advertising, and connected TV with overall predicted growth rates of 14,25, and 26 % for each segment. Connected TV is becoming more widespread, thus providing an opportunity for revenue growth for Magnite. Their main competitor is Google who runs their own sell-side platform for digital ads, There are also many other smaller SSPs. Magnite considers themselves the largest independent SSP as they are not an ad publisher like Google. SSPs play an important role in the industry of digital advertising by providing the tools for Supply path optimization for buyers and greater control of inventory for ad publishers. Supply path optimization (SPO) describes the recent efforts from advertisers to reduce the number of vendors they work with to optimize their ad space. Typically, in an auction you would want the largest number of bidders, but with the introduction of header bidding in last few years, more suppliers mean more headaches and nothing much more. Header bidding is a technique where publishers offer ad space to a lot of ad exchanges and allow the highest bidder to win.

Competitive Advantages

There are two main advantages for the Rubicon Project: Independence and Scale. The importance of independence should not be understated. If google is both the platform running the ads and the person selling those ads, publishers will naturally become suspicious that they are getting the best deal. Magnite is aiming to penetrate the walled gardens of Facebook and Google, especially in the Connected TV space. Their relative scale to other competitors is their other competitive advantage. The term flywheel is overused I know, but flywheel. By having more publishers, MGNI can leverage their network to get more advertisers to get more publishers and on and on. Since they have the largest scale, especially after the merger, they can leverage this to continue growing.

Variant Perception

Although the stock has recovered from the pandemic lows, it trades below their historical prices and the multiples the company trades at is far lower than other Connected TV plays. Once the market realizes the high growth opportunity Magnite has I expect Multiple expansion. The company is also part of a highly hyped market and as multiples go bonkers, there is room for the multiple of this company to run. Another aspect of the variant perception is the recent increase in streaming and spend on digital ads from the presidential race. Since the presidential race has moved online (3x the spending on digital ads compared to the last cycle), I expect the next earnings to beat expectation and the stock to run up. We could also see a run up heading into earnings as people latch onto this thesis.

Risks

·       One risk is that of vertical integration of publishers where they develop their own platforms like comcast did for Peacock, their streaming service. The other risk is that they don’t scale efficiently, and the walled gardens of ad tech remain as is with Google, Facebook, and Amazon controlled all the ad space and selling on their own marketplace. If a major customer cancels, this could drastically hit the stock price, network effects work both ways.

    There is one other earnings play that I own: Intellicheck. It does identity verification for retail businesses and the recent retail sales numbers  are encouraging. In addition, a lot of their revenue is from liquor stores (and places that sell alcohol) as they have been historically used to catch fake IDs, thus higher alcohol sales in recent months play right into their hands, especially going into the holiday season where sales of alcohol tend to be higher. 




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