Chit Chat Stocks - Magnite (MGNI) | Fundamental Analysis

Episode Date: November 29, 2020

Magnite is this week's stock for our fundamental analysis. Magnite is an online advertising firm based out of California. Before being named Magnite, in 2020, the firm was known as Rubicon Project, which was founded in 2007. After Rubicon Project and Telaria merged in March 2020, a new company was formed that 3 months post merger was rebranded as Magnite. Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Watch this episode on YouTube: https://youtu.be/Ye5r0o2WfHw Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. All right. Welcome in, everyone. This is the Fundamental Analysis Show on Chit Chat Money. Before we get started, though, we got to talk about, one, our seven investing friends, and two, what we're going to be doing for the month of December. I'll let Ryan talk about what we're

going to be doing in December, and then I'll talk about seven investing, and then we'll get on to talking about Magnite. Okay. So for the month of December, we are throwing out the script. We are not doing our typical Tuesday, Thursday, and Sunday shows. It's going to be 25 Stocks of Christmas. So every single day, December 1st through the 25th, we're having an interview. We're having a guest come on, and they're pitching one stock. So it's basically 25 stock pitches. There's plenty of really good ideas that we're already seeing.

We have them all lined up, and I think you guys are definitely going to enjoy it. Yeah, it's friends from Twitter, analysts we've met, people we've interviewed before, and people on the 7investing team will be a part of it as well. So I'll talk about that. Yeah, I was going to say, it's probably the most exciting thing I'd say we've done ever. So far, yeah, a little bold, but we're excited to see how it works out. But, yeah, we need to talk about the partners at 7invest. You can get $10 off your first month with the service

if you use our code CCM at checkout. It gets you $7 on your first month. Looking forward to talking with these guys on the 25 Stocks of Christmas to kind of get an insight into what they do, how they look at companies. I don't know, Ryan, do you have anything else on that? Yeah, I mean, we say it on every show, but the analysis is actually really, really good. We look forward to seeing their recs all the time, and we are going to be getting some. They're not recs, but they are companies that they like,

so you kind of get a glimpse into the way they think. Yep, all right, and then we're going to now talk about on our Sunday show, Magnite. First off, bad name. It really makes me think about, like, a cave. Terrible. Yeah, it makes me think about stalagmites or whatever those things are called. I think I might be saying that wrong. Really bad name, but you want to talk.

It sounds like one of the things on the elemental chart that's, like, way down there. Yes, yes, one of those last ones, like, 93. It also sounds like it's ran by Billy McFarland. I mean, it just feels shady. But whatever, I'll get into what they do. Magnite is the world's largest independent sell-side ad platform. So if you don't know how that works, a user would sign into a publisher. So, for example, let's say ESPN's Roku app.

ESPN has a commercial spots in there. This is called their ad inventory. So they will take that ad space and they'll give a request to a supply side or a sell side platform like Magnite to conduct an auction to fill that spot. And whoever takes the bid and that auction. Who is the whoever? Whoever is technically it's a demand side platform usually, but the demand side platform is servicing brands. brands so let's say coca-cola wants to uses the trade desk to uh give them their ads and they would mix it with the ad inventory that magnite controls and so that auction is done and then

coca-cola fills the ad spot on espn's commercial and this is all happening within a millisecond right and that's all just that's one example but it's happening all over so they have mobile desktop connected tv those are i think the three sides of magnite's business um so they'll get the specs whether it's like it's a mobile device uh this is how big the banner ad is this is how long it's going to be or whatever and uh magnite supplies that and the trade desk or a dsp will fill that through brands okay i think that makes sense uh it's again it's a little complicated but just you know they're supplying the ad inventory right they're reaching out with that stuff and if it doesn't make a ton of sense i recommend going and looking at daval kotecha's

uh twitter he has on his pin tweet there's a great layout that he's drawn up on what it looks like and it's really helpful um but you're probably wondering why on earth this isn't like an enormous company because it seems like it's a huge tam oh yeah evita tam right we're gonna right and the uh the reason is most of the companies that do this are the walled garden so google facebook i guess amazon now with ads um they control all of it so supply side and demand side and so just recently there's been a big surge of independent ad platforms uh and the trade desk is the big demand side one um and magnite is just the it's technically the largest independent supply side platform but it's a combination of and i'll get into this talaria and rubicon project who were

two smaller independent ones so they merged and built the largest supply side platform but they really are trying to be the anti-walled gardens and they put this like the first line on their website says we are magnite your global alternative to ad tech's walled gardens and the giants who live there yeah they're trying to play into that uh mission a little bit you know there's a lot of anti-big tech right now um right do you think that's kind of what they're trying to go for definitely get some sentiment on their side magna is just the so they're just the combined company of talaria and rubicon project i was a shareholder of rubicon project not too long ago i was actually a shareholder of talaria before the merger and i ended up selling shares which i guess we'll talk

about at the end but anyway rubicon project and talaria merged about a year ago if i'm not mistaken and both were smaller supply side platforms now they've combined talaria had a connected to tv side of their business rubicon did not but rubicon had more of a stable mobile and desktop business so they've since merged um some other stuff about the history i guess i think all the executives or the founders from early on are no longer in the company i might have that wrong but the not a single executive or board member owned more than two percent of the company and there was just one person with more than one percent and everyone else had less every executive was paid over a million dollars last year in total compensation saw that on the

proxy that's a lot of cash for a company of this size right and it just honestly it felt a little bit like a shady proxy statement but we can get into that later as well why don't you get into the valuation yeah so just when you see that one million dollar comp number you might think okay well if the company's quite large that's not that bad but this company is not that large their enterprise value is about 2.05 billion dollars and we're recording this pre-thanksgiving so this number could change and their ticker is mgni trailing ev to sales of 10.9 they had a tough q2 so normalized that multiple might be a little lower if we do something along a crude arr which would be annualized recurring revenue which with this business may not be applicable but if we just

extrapolate q3 uh the ev to sales would be about 8.4 so still high uh but not as bad as like 11 they're all unprofitable not cash flow positive so can't really look at a multiple there margin adjusted ev to sales which is our in-house thing to kind of look at a growth company which is ev divided by gross margin and also divided by the trailing sales growth that is 138.7 one of the largest we've seen yeah uh typically something hangs around 50 they have low gross margins right yeah it's not as high as you'd think and revenue growth again it's not as high as you think which is inflating that number those things can change over time especially revenue growth can be quite shaky um in a good way or a bad way but yeah you know no dividend uh lots of stock-based

compensation stock-based compensation uh so conservatively i mean you probably would expect two to four percent dilution you know on an annualized basis going forward if this trend continues you know of course maybe there's some things with the merger new management might need to get some skin in the game or that's what uh people that you know that's what they're telling people just so they can get more stock and more money um they have around 50 million dollars in working capital um assets and liabilities okay yeah so their assets and liabilities are kind of inflated because they have a lot of accounts receivables and a lot of account payables if you back that out it actually doesn't really have that much on the balance sheet it's very light

um and those things which will even out over time hopefully right as long as the payables aren't a lot higher than the receivables um it kind of makes those assets look a lot bigger all the numbers were a little tricky because of this merger i mean it was basically two companies merging and they were pretty much the same size i think it was maybe uh rubicon was a little bigger and Rubicon technically acquired Talaria, if I'm not mistaken. And so, but it was really just a merger. And so a lot of the numbers look inflated, but I mean, do you want me to get into the earnings? Yeah, I just want to note that as of September 20th, on a pro forma basis,

they had a $400 million accumulated deficit. So you got to think they have a lot of ground to make up. You know, they've been losing money for a long time. Each of these businesses on their own have, and then on a combined basis, it looks even worse. okay so then third quarter revenue was 61 million dollars that was up 62 percent year over year however on a pro forma basis revenue only grew 12 percent year over year so that was that's organic it's right yeah so the inorganic growth sales growth was 62 percent because they just i mean that's one way to boost your top line is you just buy another business yeah because they have

revenue themselves uh but connected tv revenue was 11.1 million of 51 percent year over year They had a net loss of $10.5 million versus $6 million a year ago. And keep in mind, the $6 million net loss was just Rubicon Project. The $10.5 million was the combined companies. They had an operating loss of nearly $11 million, which included $2.5 million in merger restructuring costs. They said, I remember this, like a year ago, they said there's going to be cost synergies and they're going to save a lot of money. And now they're paying restructuring merger costs. That isn't a good look.

but over the last nine months they've spent 16 percent of their revenue on stock-based compensation that's pretty high they said they expect strong growth in ctv and q4 i don't know i mean it was very vague they just said strong growth so that's one note i guess but most of their revenue still comes from mobile and desktop yeah so ctv while it's the story um they mentioned it a ton on the conference call and in the earnings release it really isn't i mean what you have the number there, 11 million versus a total top line of 61 million. It's going to have to grow quickly if it's actually going to be meaningful to the real top line. Yeah. And it sounds good to be like, well, it's growing 51% year over year. It grew from 7.6 million to 11

million in the next year. Nominally, mobile and desktop grew faster. But on a percentage basis, it looks good because CTV is growing faster. Yeah. So you're going to have to expect if you're banking on that ctv for it to grow at a high rate this 50 rate for a few years at least then it'll actually start mattering cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions

apply okay welcome back next up is digging trenches i kind of already think i know what you're gonna do for this one but what's your moat rating um just looking at this business zero to three yeah it's it's gonna be low uh i'd say well just to begin with ad inventory is pretty much a commodity at this point like the ad spaces whoever can fill them at the highest rate uh that's who they're going to supply their ad inventory to so i'm not sure i'm not sure anyone has a massive mo except for the walled gardens but no independent platform which first of all they don't own the content and they don't own the devices so it's really hard you're a little bit fragile in that regard um so i don't know i'm gonna give it go low maybe a zero or one yeah i'll go like 0.5

and it's not like maybe zero it's not like if i'm espn and i have ad inventory i'm not loyal to one supply side platform exactly like whoever's going to be able to fill that space the best that's who i give it to yep i agree with all those points all right further reading um you go first what do you got um yeah so i guess how integral is the service that they actually provide because it sounds really important but for the life of me i can't figure out why they're growing so slow in what is supposed to be a booming industry right again what is that ctv and some of the other stuff mobile as well connected tv especially like especially connected tv sales growth slowed a lot and everyone in that industry is getting rich

off advertisers shifting away from linear yeah roku trade desk right and they're not seeing the same benefits i mean yeah you can say there's going to be strong growth i'm putting that in air quotes in q4 but i'm still yet to see any huge growth and i mean they should be seeing huge growth uh if go look at just go look at roku's shareholder letters and then compare it to uh what is magnates earnings reports and it's like two different worlds it's like they're competing in different spaces but it's really all ctv yeah so i guess the three variables i look at are one you know are they getting this huge bump is a rising tide of ctv like a giant rising tide lifting up this really bad boat of one a bad business model maybe i don't know i guess i'm

not an expert enough on this ad tech to you know understand if the ssp side of things is a bad business model and two i think the most concerning thing is well why is the management team not executing that's the big concern here yeah and i mean is so everyone talks about the subscription of everything that plays a very much against magnite's business model and the other part is there's just a lot of unanswered questions for me like why isn't there a bigger supply side platform already like the trade desk is like the big demand side platform and everyone always talks about it wouldn't there already be a successful supply side platform advertising isn't new yeah you would think um maybe that's a question we need to ask deval yeah uh later but yeah or some

other you know someone else in ad tech because i think it's that part is a tiny bit over our heads uh but it is concerning i think at least the management part um what are you looking at let's see all right look simply they on the earnings statement some things are in pro forma which is organic and not including the inorganic revenue of two combined companies you need to do your own combined earnings and income lines it can be misleading because some of the stuff is inorganic but they don't specifically state that it is um and because they're not allowed to because technically on gap you have to do it combined so that is something you want to look at uh the comps are going to have a tougher time once a year pass it's just you really need to

look at that because if you see a high revenue growth number that doesn't technically mean the businesses were actually growing yeah and they weren't it didn't feel like they were open about the fact it felt like they were kind of purposely misleading people i know they have to report those earnings that are combined but they weren't very open about the fact that maybe the revenues weren't growing as fast like and they only did it they only did it for the top line and then the other stuff it could have easily been inorganic they didn't really specifically state anything else even like yeah well maybe they did i guess they're losing money so it's not like they had inflated profits true that that is true all right future growth opportunities what

is yours mine's actually mobile and i think i'm looking at it now i might have stolen yours in a way but ctv it should grow on its own if they have the platform ready right they have the tailwinds they're mobile on the other hand this it already makes up 48 of their total revenue and it seems like the logical place to find growth because apple is the one they seem like the one brand that could really hurt the walled gardens with their uh i mean they crack down on the data stuff all the time and their big thing is that they have a i don't know more valuable more personalized ad experience which i kind of find to be bullshit but disregard that and so i think apple kind of feeds into that well and mobile already makes up a lot i think it's growing the

fastest nominally as well yeah that makes sense i guess mine is slightly different it's the new identification standards the loss of these third-party cookies and the new apple standards which you just mentioned so they talk about this on the conference call it has a ton of technical stuff uh which you gotta look up some somewhat of the some of the words mean but i think it can be summed up to this you know companies want to do morally quote morally target customers compared to the ways that people think that facebook and google do it uh in a unethical way i don't know if they do or not that's again not my technical expertise but magnite is increasingly going to be a place to do that it is something they want to invest in it ties into the magnite marketplace

which is where advertisers can send stuff out to multiple devices ctv mobile desktop are the big three um this is all going to be in one spot if there was any competitive advantage would this be it oh the marketplace the marketplace where you go to one spot and that's where you can get to all these devices and all you have to worry about is okay let's say we want um you know i guess i'll just define you know someone in their 20s someone that likes soccer someone that likes investing i don't know why they'd want that combo of person uh for whatever product that person that advertiser wants to do all they have to do is go to magnite and then it can go to whatever devices that person is on yeah perhaps but at the same time it's like their whole thing is that they don't want to be

the specified data collector and act like the walled gardens so they have to they essentially have to try to be the walled gardens while pretending they aren't kind kind of kind of because they they want to target advertising right and they want to do that with data because you need the data to do that but they also want to have open data collecting right so they don't want anyone's whatever identification user identification to be within this one company like facebook or google they want it to be open for everyone which that may lower their moat because that is what a lot of people talk about with google and facebook is their huge advantage is that they have data over their customers so it's like you there's a reason that facebook and google

did it that way and it's because it creates a competitive advantage i mean how does it make them any different than a smaller supply-side platform that could do the exact same thing? All right, highlights and lowlights, what do you have? Okay, so CTV ads, it's a giant tailwind. That's got to be a highlight. Other categories got back to growth in the latest quarter, which I guess is good. So they've seen stagnating revenues on that. Scalable model with this advertising that hopefully should get operating leverage over the next two three years because they don't need to double their employee count if uh the advertising demand doubles for the magnite marketplace um 10 of sales originated on the magnite marketplace

which i don't know what it came off of but that's a number probably to watch to see if that grows over time wall lights though ctv is only around 15 to 25 percent of sales again we mentioned this already the growth the high growth is good on a percentage basis but on a nominal basis really doesn't mean that much to the entire company um you know i think this might be an average business propped up by a giant tailwind and i don't like their capital allocation so decade of past investments have been bad between both companies they continually lost money when it's really like uh i don't know how they're still losing money but whatever that that's the big concern stock BlackBerry's compensation is a lot in the entirety.

I don't need to go through all the lines, but the capital allocation historically seems bad, and what they're doing right now, it also seems bad. Yeah, and we sound sort of pessimistic on this, and we got this show recommended to us by some listeners on Twitter. And so if you're a shareholder, I'm sorry, but I'm not super optimistic about the business. It sounds like a great business in theory. They're the independent player for CTV on the supply side. They're going to be just like the Trade Desk but for the supply side. But it doesn't feel like that's actually how it's playing out. The Bolt thesis is totally centered around connected TV, but that's largely dominated by Roku and Amazon, and they have the competitive advantages because they own the devices.

I mean Roku's – so A, the Trade Desk is growing their revenue at a much higher clip, both nominally and percentage. Yeah. And Roku's DSP saw 90% growth in video ad impressions. Um, and also from a much higher DSP is the demand, right? Yeah. So Roku has their own demand side platform and that's likely upwards of a hundred million in revenue that they, that they grabbed, uh, in growth yet though somehow the largest independent supply side platform grew revenue by like $3.5 million when it's not like people are maybe people are thinking like it's not apples to apples they're smaller it's like but the ad money that's coming in is still the same between roku like it's all moving away from linear it's not like they get a smaller piece of that pie unless they just don't have the platform

to handle it it doesn't seem right to me yes like you said poor capital allocation and the shape the proxy felt a little bit shady uh do you want to mention that revenue metric thing that's usually like i mean i may have been off in this but it looks so their metric uh their performance metrics so what they get paid based on their extra compensation they can get up to basically twice their salary if they hit certain metrics and one of them was revenue growth which was a lot of it was inorganic it didn't specify that had to be organic growth and all of them made double their salary last year and in general revenue growth is i mean we don't like that adjusted ebita is used But that's even better than revenue growth. You really want it to be either free cash flow, earnings per share, whatever. But revenue can, if you start selling like Uber, DoorDash dollars for 90 cents, you can really hit those revenue targets.

Yeah, or you can go out and buy another business and inflate your revenue just to meet your performance metrics. And it would be one thing if they weren't getting paid that much, but for a company that's only generating probably quarterly $30 million independent of the acquisition, they get paid $1 million a year? Each executive? Yeah. That seems really high. That is high. All right. More or less interested, I think we both know the answer to this.

Less interested, there's a lot of red flags with management. there's a lot of red flags with the business model there's a lot of red flags with them getting propped up by a tailwind that won't be permanent and that they're not even even growing as fast as the industry anything else that you saw that were red flags no i listen i've been a shareholder in i was a shareholder in talaria and you just sometimes it's hard to specify but you just read the conference calls and get a shady feeling i started i mean this the story sounds nice right but yeah and it just um it was underwhelming reading a lot of the commentary from management two years ago and then i looked back on it and also i don't know like it's a

terrible name and it sounds like a name like i know that that sounds like bullshit but it sounds like they're trying to excite people by doing name changes and ticker changes like possibly that's possible it seems useless um whatever but yeah i guess i'm just not super optimistic about it. Yeah, definitely not interested in owning shares. Valuation is also a thing. Over 10 times sales is real and you got to be confident in the business if it's trading over 10 times sales. All right, that's going to do it for this episode. As always, remember to use our code CCM to get $10 off your first month at 7investing. We are not financial advisors. Remember, anything discussed on the show is not formal advice. This is not a recommendation.

don't. Again, I say this a lot when we give hard takes on a company just because we want to reiterate, this is just commentary for you to use in your own research. If you want us to do any other shows, DM us. You want to say something, Ryan? Yeah. And we are also not foremost experts in the ad space by any means. There are businesses that I think we understand really well. This isn't one of them. So we can be wrong. I recommend maybe we should start giving references to people that might be better i recommend looking at daval kotecha's stuff uh he's much better in this space yeah exactly okay and we're not gonna have i guess we're not gonna have any of these shows for another month because of the 25 stocks of christmas but still give us recommendations

at chit chat many podcast at gmail.com or dm us on twitter the link will be in the bio thank you all for listening to this episode we'll see you in january Thank you.