Yet Another Value Podcast - Choice Equities' Mitchell Scott provides update on $CROX thesis and thoughts on Magnite $MGNI

Episode Date: September 22, 2024

Mitchell Scott, Founder and Portfolio Manager at Choice Equities Capital Management, joined the podcast for the second time to provide an update on his Crocs, Inc. (NASDAQ: CROX) thesis and Mitchell's thoughts on Magnite $MGNI. For more information about Choice Equities Capital Management, please visit: https://choice-equities.com/ First appearance on $CROX: https://www.youtube.com/watch?v=hzYLXDJZIaE Podcast on $MGNI with Dan Day: https://www.youtube.com/watch?v=we2o8Jw7Hno Ryan O'Connor's piece on $MGNI: https://www.crossroadscap.io/documents/trust-busting-update Chapters: [0:00] Introduction + Episode sponsor: Daloopa [1:36] Update on $CROX thesis [4:22] How has Mitchell's views on whether $CROX is a fad changed (or not) [7:26] Crocs' partnerships driving the brand [10:05] Macro consumer, consumer weakness, anything of concern for $CROX / margins [15:05] HeyDude acquisition [21:00] What does Mitchell see that makes $CROX an alpha opportunity [22:46] $CROX capital allocation moving forward / final thoughts on $CROX [26:56] What is Magnite and why are value-oriented event investors on the small-cap side talking about to this company? [30:45] What does Mitchell see that makes $MGNI an alpha opportunity [35:06] $MGNI's Netflix and Disney deals [38:17] Big customer wins squeeze take rates down for $MGNI? [44:39] Why isn't $MGNI growing faster? [47:53] Key to unlocking personalized ads on CTV streaming, is $MGNI key to this? [52:19] $MGNI bear case / insider selling [54:21] Google DOJ anti-trust case and how it affects $MGNI Today's sponsor: Daloopa Hey there, fundamental analysts - Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let’s talk about something that could transform your workflow—Daloopa. Daloopa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance—all at your fingertips. And here’s the best part: Daloopa updates your models in near real-time, which is especially important during earnings season, tailored to your modeling format and style. Imagine never having to update your models again. With Daloopa, you can reclaim your time and focus on what really matters—analysis and research. Want to learn more? Create a FREE account at Daloopa.com/YAV

Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that could transform your workflow, Delupa. Delupa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance, all at your fingertips. And here's the best part. Delupa updates your models in near real time, which is especially important during earnings season, and it's tailored to your modeling format and style. Imagine never having to update your models again.

With DeLUPA, you can re-clean your time and focus on what really matters, analysis and research. Want to learn more? Create a free account at dilupa.com slash y-A-V. That's Delupa, D-A-L-O-O-O-P-A dot com slash Y-A-Vee. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean a lot, if you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have one for the second time.

My friend, Mitchell Scott, and Mitchell is a portfolio manager at Choice. he's Mitchell. How's it going? It's going great, Andrew. Great to be back here with you again. So thank you for having me back home. Look, I'm really excited to have you back on. I've been meaning to have you back on. If you had asked me before we scheduled this, I'd been like, oh, yeah, Mitchell came on like four months or so ago. It's been a year. So let's talk all that in a second. Before we get there, quick disclaimer, remind everyone nothing on this podcast and investing advice. That's always true. But I think we're actually going to hit two stocks today. So just remember, double the due diligence for you, double the work, double the not investing advice,

consult the financial advisor, and all that jazz. Mitchell, the reason we wanted to have you back on is, A, I wanted to have you back on, you're a sharp guy, I love having sharp investors on, but B, we wanted to do something a little abnormal. We wanted to do an update on Crocs because it's been about a year. The stock's actually done quite well since our last pod, but I think you think there's a lot of juice on the bone. and I was just reading the Q2 call, things seem to be going quite well over there.

So we'll start with the update there, and then we'll go to Magnite, which is a very popular stock among event-driven value small-cap investors. And you said you want to talk both? And I said, normally it's one stock, one pod, but, you know, Clemson's having a little bit of a down year in college football. So I got to, I'll toss you one bone. But why don't we start talking Crocs? People can go listen to the first pod.

I'll include a link to it in the show notes. That was August, 2023. I'd love to just get your updated thoughts, and I've got some updated question for you. So I'll turn to you. Yeah, absolutely. Well, my day job gives me a great diversion away from the Clemson, Georgia opener that was a couple of weeks ago. That was pretty tough. Crocs, yeah, really just an update, I think, is in order.

Magni, there's kind of two business segments there. So depending on how you want to break it up, we'll kind of do that and some of vendor stuff, for sure. That's pretty interesting. But Crocs probably belongs. I don't think I've seen it in there, but probably. belongs in Europe, why, the low multiple series that you've done periodically. And so here it is. It's done well since we were last talking about it. But, you know, I don't know what the stock is up exactly, maybe 30, 40 percent. But the multiple is now.

I think we talked it. It was a little under 100. And now it's kind of in the 13, 140 range. So something like that. And inside of a year, you know, that's not nothing. Not bad. Not bad. And yet, you know, it's got a 10 times earnings, trading multiple, 10% free cash flow yield. Most of the things we talked about on the podcast have proven out. I'll say the one sort of caveat is the hey dude healing, I suppose you could call it. It continues to take just a little bit longer, but it looks like that's sort of about to be turning the corner. There's a lot of things that they've done there that we can talk about. that really should be setting a stage for a leg of growth upcoming.

And I think if that happens and when it does, people will start to see a company that looks a little bit more akin to one of these growing brands that, you know, the growing brands, you look at something like Decker's, you know, when they're growing well and getting operating leverage and good balance sheet and buying back shares, they tend to trade on peg multiples. And this stock is not doing that currently. But I think that's kind of the opportunity as we look forward to the next year. So there's a lot in there I want to unpack. And you actually hit tangentially on a lot of the questions I had.

But I guess the first is the overarching question with Crocs. I had this last year. You would have had it three years ago if you were looking at Crocs. The overarching question with Crocs is, is this a fad or is this a sustainable business? And we now have another 13 months under our belt. And 13 months of, you know, you can talk about the continued growth trends in everything building on international. But I just want to start with that question, because that is the key question you're asking when you're looking at the stock and you're answering by buying

the stock, right, is Croxifad? So how have your views on that evolved over the past year? Yes, I mean, I think just another year of support for the thesis that it is a staple of consumer households in America that can be brought out to other international markets. And so, you know, they've got to take care of the brand. They've got to continue to market. They've got to continue to drive innovation in order to perpetuate that. They continue to do those things. They understand how important they are.

We talked a lot about gibbets. I think that continues to be a growth driver for them. And also, you know, equally as importantly, you know, an element of perpetualization for the brand because you just buy another gibbet and stick it on the shoe. And, you know, now you're kind of unique amongst your classmates or whatnot. not. So they just continue to kind of execute on the playbook. You know, they were a pandemic winner, but I like to really think that they just won during the pandemic is the way I kind of

think of it. And, you know, continuing to do what they said they would do and another year of the books to kind of bolster the execution thesis. If I can just jump in there, the thing that's most interesting to me is the partnerships they do with Crocs, right? They it just, the number of brands and celebrities that want to partner with Crocs and do these limited edition drops and the kind of Nike, when they release, you know, really, you know, New Air Jordans, New LaBronches, those are the highest heat items is what they call and things that when they stock them, they're going to fly off themselves. And Crocs, I mean, they've got some high heat items. And I'm just surprised by the partnerships, you know, when I, maybe it's because

I think of Prox from 2008, right? When all my friends who were in. med school or you know working late they were doing crox and we were i was doing crew and like you'd use it to like stop out to the boats and stuff but now it's real brands like i'm looking at their instagram right now not that this is the highest end brand but they've got crocs happy meals and you know we mentioned the kfc ones but there's there's artists who are dropping $140 crocs that i think they said are selling out inside of minutes and stuff so you know i i there is still a little bit of me that's oh i you know these shoes are they're so dang ugly and they're not super functional, but when you get this many celebrities, like, it does feel

like something sustainable. So I rambled a little bit there, but I'd love to just toss it over to you and get your thoughts on kind of how the partnerships are working, driving the brand, and all of that. Yeah, that's been a major part of it, right? Kind of probably the big unlock for them since, you know, Andrew Reese came back in the CEO position of the 1617 period is how to connect with a completely. consumer, how to make it relevant. And, you know, all their marketing's been is digital.

So, you know, they're focusing on a handful of celebs and collaborators, influencers, and that's how they're getting in front of people. And so they've really segmented who they're targeting for, you know, this group of people and that group of people so they can find a celeb. And, you know, it's pretty neat how it all came about, right? It was a Post Malone, I think, was the first sort of guy credited with sort of getting that engine going for them. But all the celebs are kind of into it, too. So, you know, that's a real positive for that speaks for the brand.

There was an artist. I look, I'm starting to feel my age because they do the MTV VMA Awards. And I know, like, the only artist I know there is Taylor Smith. But there was an artist who, just glancing at their Instagram, I was prepping for this, I would not assume was associated with, I mean, Crocs is, it's kind of, I don't know if whimsical the right term, but it is very corporate, right? You can tell these are getting made and sold for profit. It's an artist that I wouldn't have thought would partner with them, right? Like, they probably wouldn't partner with GE or J.P. Morgan or something.

But they, I looked at their Instagram, and the last 10 things they posted was on their Crocs partnership and launching new Crocs. And so, yeah, it's a problem, but people clearly enjoy the association and everything with it. So the other thing on the fad that I thought, address again who knows things can grow for a long time and then hit a wall but the CEO on one of the most recent thing uh earnings call she said hey this are six year of you know double digit plus growth like six years of double digit growth one time's lock two time yeah but six years is driving driving on a trend that's a lot i think you're not good you want to say anything on that go yeah i would just add they're kind of broadening out the silhouette profile as well too so

five years ago sandals was nothing now it's 15 20% of the crox brand revs so you know that's just one more you know a lot of the crocs are sort of the classic clogs etc and then immediate sort of spent off to that

but you've got sandals and that's a very big market and so continuing to drive an adjacent field quickly ask I think both you and I are value investors I don't think we spend you know we both probably follow a lot of the, I think it was Peter Lynch, he said, if you spend 15 minutes

thinking about Mac or you spent 10 minutes too long or whatever, you probably followed that, but I do just want to ask, you know, it should come on to, if you've been following the market, Nike had a disastrous earnings was their last earnings, right? Their stocks goes down. Most of the footwear retailers have had pretty poor earnings. You know, every retailer that I followed or seen, people can think of the dollar source have been blowing up recently. All of them have been talking about consumer, not a consumer in depression, but consumer weakness, consumer and then you read Prox's earnings, and I don't think they're saying the consumer is just like lighting money on fire, but you're not really seeing them talk about consumer weakness.

That is a little bit of a sign of a bridge street, but I just want to throw out like macro consumer. Do you have any concerns or are there any worries? What is Crocs doing different than everyone else? Yeah, I would be more concerned if it was trading a 28 times earnings rather than, you know, nine or ten. This is kind of the value investor in me and the belief in a margin of safety. But look, if the earnings aren't there, it's not going to be a good stock, right?

So the earnings need to be there. As far as macro goes, I love that Peter Lynch quote. I think about that a lot. But, you know, depending on how bad things might be, they would be negatively impacted for sure. And there would be an earnings shortfall. And, you know, the stock might not do well

for a period of time. And a bigger picture of view, the stock can continue to do well so long as the brand continues to be effective and management continues to drive that. So not macro, not asleep of the wheel on macro, certainly thinking about it. And as a driver, just in terms of consumer spending, this is a consumer product. Prox is pretty well positioned in the footwear market. that, you know, the average selling price is 55, 60 bucks. And, you know, that's a, that's a trade down for some people, right?

So they're in a pretty good spot with a very broad customer base who, you know, if what they're, if the products they're selling, if the products they're putting out continuing to have relevance, I think they'll do fine. Just because it's not, you know, it's not high luxury, which is sort of immune to most cycles, but it's not a $175 shoe that people are going to trade down now. Someone on the Q2 call, I think it was the Q2 call, maybe it was a comment, but they said something along the lines of, hey, you guys are still in Walmart. I saw you on Walmart.com.

I'm surprised by that. And I'll let you, I can tell you what the CEO said of response. I'll let you take that. But I remember five years ago, 10 years ago, there was, I think it was competition domestified. And it talked about how a lot of brands have to choose not to sell. to Walmart because when you do that, Walmart is such a big player. They will relentlessly grind your margins down and eventually you're just kind of commoditized and you're making no margin. And, you know, when I think of footwear brands, Nike's not selling in Walmart. I don't

think Adida sells them more. Like a lot of the footwear brands don't do it. And again, I'll let you're on how the cruxio. But I was a little surprised by that, right? Like this isn't Crocs that upstart, you know, 15 years ago, they almost went bankrupt because they were selling every gas station America is selling crox, right? Like, they almost strayed their brand. I'm a little surprised by a business that we just talked about. It's not a fad. They've got a lot of people who want to partner with them and everything,

but they're selling crocs in Walmart. I was just a little surprised by that. So I just wanted to touch on that with you. Yeah, that's a good question. We followed up with management on that after the call. So the first thing I would say is, you know, that's not new news. They've been in Walmart for several years. it was funny when he asked and they see it was like well we've been there for a long time so

yeah i was a little embarrassed for him but it was the thought process behind it is what really interested me and so your point about the margins so i don't want to get overly granular on like one particular quarter but they've got no problem with margins right so most recently gross margins were up healthily they've got industry leading gross margins and profitability margins I think your question is probably a little bit more about, you know, does this impair the brand's ability to sell at full price over a longer-term time horizon? And so, yeah, thus far, the answer is no. Walmart, a lot of the Crocs core customers shop at Walmart. You know, if they feel like they need to be in Walmart, that's the decision I'm sure that they've carefully considered and, you know, they're managing appropriately.

they do a pretty good job of mannaling their channel approaches. So they're pretty diversified. So that's kind of how I would answer that. Let's quickly talk about the hey dude acquisition, right? I think when you and I chatted last year, the hey dude acquisition was it had just kind of completed. And I think it was a big point of bull bear debate on the stock, right? Bowles would say, hey, this is a manager team you want to execute, new vertical, all this sort of stuff, look at the growth. I think Bears looked at and said, this is what brands do when they're stalling out in growth.

They go buy something and it's completely different and it's the first step of them kind of starting to stumble. And we all know companies that, you know, they had a growth business, started to lag, they buy something new and then both management takes their eyes off, both balls and it falls apart. I love to talk to you about how the Hey Dude acquisition is going in your mind now that we're kind of two years into the acquisition. And feel free to mention Sidney, the new director of, what is she? She's the new, I can't remember what her role is, but she's the new director of product marketing. Feel free to mention Sydney, Sweeney, as much as you want, because I'm sure it can't hurt the YouTube algorithm. Yeah, right. Yeah, I was just on a lot with her last week talking about, inking the new directorship of dude.

She seems pretty fired up. No, I've not spoken to her about it. I was about, you know, more than I thought. Yeah, no, no, that's not true. So, but I do think she's going to be really good for the brand. just in terms of how hey-do is gone, I mean, to your original point, yeah, I'd say kind of both are true. There's enough evidence here to suggest both are true. I think what it's going to show in time is it was really just a digestive phase for the acquisition,

and it's going to end up being a good one. So there's a lot of things you can point to, but in terms of just strictly looking at the here and now consolidated financials and the numbers are reporting, you know, it doesn't look great. So when they bought the brand, I think they had a billion in revs now they're $850 million. And

we kind of talked about it, right? So a little bit too much product and the wholesale channel, changing wholesale channel partners kind of took some wholesale channel partners off. And so they had to manage through that. But what they've done is, you know, the right thing for the long term

health of the brand. And, And that appears to be, I would say, running its course sort of now. And so what you're seeing is, and this is always interesting kind of consumer products companies, right? Is, you know, what are they doing with the marketing? You know, arguably they were playing kind of roped up for, you know, a handful of quarters while they were cycling through inventory that was in the channel that they needed to clear out and get into a healthier position. And so inventories are down on the books and in the channel. The commentary we're hearing from, you know, and market partners is really good for the first time and a while.

So there's some real excitement about some of the new stuff that they're putting out there. They have a new brand of, new chairman of the brand of Hey, dude, Terrence Riley. He's got a really well-regarded background as a marketer. And so, you know, one of the first things he's done is brought Sidney Sweeney in. And she seems to, you know, at least in terms of driving engagement online, actually seems to have somewhat of an immediate impact. So that's really promising. It's kind of interesting to see what he did there.

You know, if you think back to what he did at Stanley. You know, he took that from what, 70 million in sales or 700 million in sales. It was like four or five years. It was kind of a good period probably to be doing that. But I mean, that's meteor growth. And how he did it, you know, Stanley was an old like Army coffee cup. company, right? And so he just really got in front of the female

consumers and drove interest with them and then broadened it out from there. And so somewhat like that, this is kind of how he's decided to make Sidney Sweeney, the chair of dude. So they're trying to

be a little bit more relevant with the women and then, you know, the belief is the men will follow. And so we've seen that before and it's a little bit of a different angle, but seems like it's also a good start. So you're seeing some of this show up in recent reports. You know, their unit sales were down, but their ASTs were up.

So healthier position. We're looking at stuff online. We're talking to people that feels healthier. And so now they've got some new shoes, new skews, new silhouettes. And he's got a very large budget, relatively speaking, to spend on marketing. in the back gap the year. So that's part of what Sidney's when he was. So anyway, it feels like a lot of the heavy lifting in terms of getting the brand in

position to grow and succeed and respond to marketing has all been sort of put in place. Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that could transform your workflow. DeLUPA. DeLUPA delivers perfect historicals for thousands of public companies. That means every KPI. operating data, financial metric, adjustment, and guidance, all at your fingertips.

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I should have asked you earlier, but I'll just ask here. I think it was a little forgetting because we have done it. But I like to ask every guess for every stock we pitch. Markets competitive place, right? Yes, Krox trading at 10x earnings, but that's just, you know, anyone can see that number. What do you think you're seeing in Krox that the market, the average investor, whatever it is, is missing that makes Krox an alpha opportunity? Yeah, that's a really good question.

I mean, I think if you just look at the whole body of work, what you see is a management team that has proven marketing muscle and an ability to drive product innovation. And so I like the Hey Dude brand. I think it's a natural fit with the Crocs brand. They're going to piggyback on international distribution partners that they already have for Crocs and basically the same playbook. So I think they've got the right playbook.

You know, I would also say the business is just incredibly profitable. I mean, it costs like $14 to make a pair of crocs. And you saw, you know, the MSRP is like 55 or, you know, all in. It's, you know, 30, 35. So it's almost a 60% gross profit margin. And 25 to 28% off margin with, you know, 3% capbacks or something. And so just generating a ton of cash. So if they've got reinvestment opportunities and they can continue to drive new sales through that,

they should be able to drive earnings higher, buying back stock, and, you know, it should re-rate once they sort of cycle past these sort of down growth numbers to a more traditional multiple that's higher than nine or ten. I'm glad you mentioned reinvestment because that was my last thing I wanted to touch on here. In the, right now, I'll give the numbers. Right now, Crocs is a market cap of about $7.5 billion. In the past 12 months, they've bought back about $350 million of stock. So, you know, that's almost a 5%, let's round it up among friends. That's almost 5% of the stock retired at kind of the current market cap, right? They probably did a little more because they were buying a little low.

But about 5%, not nothing, and these guys generate a lot of cash flow. Alongside that, they've taken debt that mainly came from the hey-dude acquisition. They've taken debt down from $2.5 to $1.5 billion over, let's call it past 18 months. So, I mean, that's a lot of cash flow. That's a lot of capital allocation going to debt pay down to share buybacks and that sort of stuff. Now, if you read the calls, they are kind of at where they want to be in terms of leverage. So business generates a ton of cash. I want to ask you, like, what do you expect? What do you think about capital allocation going forward? I think the main answers are you could tell me the game is on. They are going

to be retiring stock aggressively, you know, switch it from 350 million in stock buybacks to and a billion debt paid down to all the stock buybacks. I mean, that's a lot of stock buybacks. Or you say, hey, they just did, hey, dude. They're excited about it. They think it's about to start really growing. They're going to look for the third stool, the third leg of the stool. They're going to look for the fourth leg of the stool.

So I've led you on two paths. I'd love to hear you, do you think it's path A or B? It could be, you know, a combination, or it could be path C. They're going to get into space rockets or something else. I don't know. But I'd love to hear what you think capital allocation looks like going forward. Yeah, I'd definitely have it was not past. see. And I don't really like that be all that most either, at least in the near term. So,

and we've, you know, whenever we speak with them, we kind of throw in our two cents. Yeah, we would really prefer to see share buybacks here. And it's in the company's history. It's in their DNA. They've been through two different spots where they, you know, gobbled up 20 to 25, maybe even 30% of the float at two different episodes. And, you know, it's been one of the better performing stocks in the market over the last five, 10 years. And that's a big part of it is the capital allocation. Yeah, capital allocation and reinvestment opportunities, right? So if you can get those two things that are reasonable valuation, you can really do good returns. It's interesting you say reinvestment opportunities, because reinvestment opportunities you think about like really

deploying cash into CAPEX and stuff. And like here, it is growing, but it's kind of nice because as you said, now, this can change, but any brand, any consumer-focused thing, generally is going to grow capital life, but it's going to have all this growth, and it's going to be pretty capital light in the growth. Yeah, they need to fund some working capital and some accounts receivable, maybe a plant, but, you know, they can grow, it's going to be pretty capital life, any incremental growth, and they could grow at a 20% clip and still buy back 20% of their shares. And the key thing, you know, you're underwriting, this is not a fad, this brand is sustainable. It's not about to go off a cliff. And we've all seen brands go off a cliff for

many, many a reason. But that's kind of the nice thing if you get this right, right? That's why the big winters often come in consumer, because they can grow capital light for a long, long time. That's exactly right. Yeah, I mean, that's a major part of the pieces here. You know, if they end up being aggressive with share buybacks here, I mean, they bought, what, 2% of the float last quarter? So even if that wasn't aggressive, I mean, that's 8% a year. I mean, if you get, I don't know, 10% net income growth and then you get that along with that, that's a really nice result from 10 times earnings. I think any last thoughts on Crofts before we move over to Magnite?

No, I mean, no, I think a lot about sort of what people in the market want. And, you know, they're a little bit of an investment here. So this is kind of a negative evadoc order for them. But I think it's, for all the reasons we just talked about, I think it's the last one, or at least it appears to be setting up that way. And so they get to sort of a smoother growth algorithm that growth investors are more accustomed to seeing. And I think that's what might lead to the multiple expansion. You know, you know what else will help.

Their CEO, his first name is Andrew. And, you know, you always want to bet on CEO's name to Andrew. What is that? Let's turn to Magnite, the second stock we want to talk about. I will just let's start with. this. So I have done a podcast on it about 15 months ago. I'll try and include that in show notes, but I'd love to start just quick overview. What is wet magnate and why is every value-oriented event investor I talked to on the small company? Why are they so attracted to this

company? Yeah. So maybe it's because it can be complex. And so your podcast with before Dan and Day was really good. Is Daniel Day? It was Dan? Yes. Yes. That's correct. Okay, because that's the CFO isn't too, so. But yet, just briefly, you know, if you think about a certain way, I like to think it's not that complex. And so really, it's an exchange, in this case, it's an ad exchange. But so what are the, you know, key considerations if you're evaluating an exchange? What are the typical sort of competitive dynamics? What are the financials tend to look like?

So, you know, it's all about getting involved. volume, right? And then they connect buyers and sellers, and then they take a commission or take rate. And, you know, it's up to that particular exchange to, you know, do whatever it is they need to do to recruit the right partners on the buyers and sellers, get them on their exchange, and then they get a small little piece of each transaction that happens there. So that's kind of the big broad picture. Can I just correct me if you're wrong, but I believe like listeners might be familiar with Trade Desk. Trade Desk, if I remember correctly, is a supply side. I can't remember if they're mansit. But Trade Desk would work with like your Colgates,

your Cokes and everything. So they would aggregate the advertisers. And then someone like Magnite would aggregate your, you know, their actual partner and we're certainly going to talk about it, Netflix, Disney. The people who are actually providing the inventory that you're watching the ads on, they're going to aggregate them. And then they kind of meet in the middle and match everyone up. So they're working with your Disney's, your Netflix, the people, you're yet another value podcast. There's your people who are inserting it ads into them, not the actual advertising themselves. Am I kind of thinking about that correctly? You were thinking about that exactly correctly. Yeah. So what I was going to say is it's kind of like a bow tie or an hour.

and this market has developed a little bit differently than, say, you know, stock exchange or what have you. So, yeah, you've got publishers who own ad inventory that they want ads placed on Magnite will represent them because this is, you know, on the open internet, on desktop and whatnot, because that's like trillions of impressions, like little ads getting matched, and this stuff is the pipes and the connectivity is all somewhat complex. So Magnite would represent them with their pipes. They would sort of highlight their inventory. There would be somebody in the middle that would sort of process the ad back and forth. The trade desk would be on the demand side platform representing Colgate, Palm Olive, whoever it is, and then it all sort of connects through

there. So we can spend time going down the rabbit hole and talking about the understanding the pipes and whatnot. From a big picture of view, I place a lot of importance on understanding sort of what's happening with the market and then who is on the exchange. So who are the major partners, who are the major customers, who's driving the inventory, that kind of stuff. And I'll just note not to talk up someone else's research as well, but our mutual friend, Ryan O'Connor, had a fantastic, at Crossroads Capital, had a fantastic piece just this month that also included a link to the show notes, if anybody's interested in learning a little bit about that, mainly focus on the DOJ upside, which I'm sure we'll talk about.

But I have to mention that because it's a big piece in a small word reading. All right, the same question I had with products. Markets' competitive place. what are you seeing in Magnite that the market is missing that you think makes Magnite an health opportunity? That's a great question. And just a second, your comment on Ryan over at Crawlstreads, they've done a really good job. It's more checking out.

Yeah, what I would say, so I was speaking with somebody about this the other day and it's going on me that every time I speak with a potential investor about Magnite, I get two reactions. The first one is a groan, and then the second one is a yawn. And the groan basically comes from highlighting something that is an ad tech player on the supply side. For the last decade, that has not been the place to be as an investor on the long side. And there are a lot of reasons for that, but primarily in the one sentence, I would just say that Google has just completely owned that space. and given anybody really trying to compete there a very difficult time and have given them not a great impression for investors to invest on that side.

And then the, so that's kind of the grown, you know, in addition to the fact that sometimes getting into the plumbing of how the pipes are all working can be a little bit of a cumbersome task. So people kind of groan there. Then they look at Magnite and, you know, I guess right now the stock's down. and there's, you know, $600 million of revenues. It's a small cap company at $2 billion. Are they really going to, you know, make a meaningful difference in this world?

And then they kind of yawn and move on to the next. So there is sort of the stigma, I think, that has somewhat followed this company for some time. Not necessarily as a fault of their own, but really just a symptom of the space. there are a lot of reasons that may be changing the Google antitrust thing that could change things dramatically I'm not an antitrust expert I think even antitrust experts are still

it's a bit of a wild card right how this is going to play well you know I've done a lot of antitrust and I can tell you you take one case to two different antitrust expert and it's like it's a lock the DOJ is going to win it's a lock that DOJ is going to lose so I I don't know if antitrust is experts or that expert. Yeah, exactly. So that's kind of critical in our minds. What I would say is

the CTV space that Magnite's been really focused on since 2019, looks like it's going to unfold differently than the open internet space did for the SSP relationship. And I've followed Magnite, Rubicon off and on for decade now, which is really a long time. So, I've been watching them kind of quietly building to this moment on both sides of the business, the DV Plus and the CTV side. So the CTV business, I think, as an SSP, has inherited the stigma that the DSP and the open exchange, open internet business bestowed upon it. But what Magnite looks like they're doing is, you know, they've basically acquired or bought

anybody good on the SSP side of the business and folded them up in-house. So they bought Tulareo, they bought Spidex, and then they bought SpringServe. And so there's really nobody left on the SSP side and CTV that is digitally native that was sort of born to do that. And what we see time and time again is it's just really hard. and people have tried and you know zander basically just got fired uh or replaced by netflix by magnate by Netflix with magnate um and so you're seeing that pattern emerge time and time again so uh long-wended answer to a short question it's the stigma that has followed the company around

and so i think it just takes a you know an open mind to be willing able to evaluate the opportunity No, that's perfect. So I do want to start, I mean, obviously, if you're bull here, what you're pointing to is, hey, Magnite won Netflix, and I believe they also won Disney, right? And you're saying, if you're partnering in the ad-supported video space and you've got Netflix and Disney, like, who's going to be bigger than those two, right? These guys are supplying the tech for them. So I just love to start by asking me, you know, how do you think about the Netflix and Disney deals? And I have some counterpoints to that, but I'd love to start by asking just how you're thinking about. Magnite winning them, how that drives revenue, growth, earnings, all the stuff people really care about

as these relationships really get underway. Yeah, sure. So, I mean, you know, Magnite won Disney three or four years ago, I guess, 2020. They've just been getting closer and closer with them and sort of started out. It was kind of Whiteway when some of their stuff, but they continue to get close with Disney. The Netflix win, you know, was up for grabs two years ago, and they went with the Microsoft company. Blanking it on the name all of a sudden. Zander? Was it Zander?

That doesn't matter. Yeah. Anyway, just blanking on it. But yeah, so they went with them and basically they got displaced and decided that they wanted to work with Magnite because they were able to do what it was that they needed to be done far more effectively. So huge sort of good housekeeping seal.

when right there from and you know the CTV market is kind of developing like right now like you can see it all coming for a really long time but

you know people are moving to CTV but the ad dollars have been delayed and following them and they're really moving over right like just this year and next year so you know Amazon just kind of like click and flipped everybody over to ad supportive in January with their whole user base. And, you know, this time of year ago, Netflix had no real ad-supported users.

And now it's 38% I think at the end of their last quarter. So it looks like it's going that way. People don't want to pay what they're paying for all these streaming programs that's gotten incredibly complex. And they'll watch some ads. So this is how linear TV unfolded. it looks like CTV is going to unfold similarly and be, you know, financed by ads. And Magnite's going to be there to place them on like a revenue sort of earnings contribution basis.

I mean, I don't know what's a bigger deal for Magnite. Just the win of the 500, you know, the 500-pound gorilla and sort of the HALA that's provided them, which we understand is continuing to help them when other new business because they're putting all the stuff on their platform. So they're getting the volume, right? So they're the place to transact. But from a financial contribution perspective,

it's potentially massive as well, right? Let me, there's a lot of things you mentioned there that I want to touch on. So you mentioned Amazon. Amazon comes in and flips this. And I can view that two ways, right? Number one, Amazon comes in, now you've got critical mass where it's like, hey, if we're a retailer and we, a retailer, movies, whatever, and we thought we could just go over broadcast TV, we can't anymore, right?

Like, we've, the eyeballs are on streaming, Thursday night football is on streaming. Netflix is going to air the Christmas games. Like, we've got to get into this digital advertising space. So you can say, hey, that just like flywheels the whole market up. But my counter to that would be, I think Netflix is doing their DSP internally, right? So they're doing their platform internally. And I just, you know, with Crocs, we talked about, hey, why doesn't Nike sell through Walmart? Because Nike knows Walmart's going to grind all their margin out and turn them into like kind of a commodity business.

And I think the take rates are really low when you get a Netflix or Disney. And I worry like, hey, are Netflix and Disney just Magnite might have the best tech, but do they just grind Magnite's margins down to nothing by saying, hey, you know, if you guys are making anything on us, we're just going to in-house it. And you need us to make the rest of your business work. So they, you know, and it doesn't mean it can't still work. But I worry, like, maybe Netflix and Disney are kind of lost leaders or neutral. And, you know, I think their margins are 20% versus 5% if they're going with really small players. So all the profitability has to come from small players. I threw a, as I'm currently to do, I threw a ton out there.

I'll just let you start. And if there's any piece you miss or you want me to remind you, I'm happy to. Yeah. So, I mean, effectively the question is the big customer wins, they're really just going to kind of abuse magnate and squeeze their take rates down. Yeah. It's a good question. Certainly something we've looked into a bunch. It's a little bit of sort of another version of the buy and build question, right?

Why don't they just do this themselves? And that's kind of what I was pointing to and sort of the long lead out is there's not really anybody out there that has. has successfully created a CTV SSP marketplace, other than Magnite. And so the ones that have, they've bought. Pubmatic is certainly trying, and occasionally they'll tout really big growth, but the base is really, really small. And Zander tried and seems to have been displaced by Magnite. So that's what we've learned by witnessing how the market has developed thus far.

that's a good point for the case there. It doesn't mean that it can't change going forward. But, you know, it just looks like history says it's very hard to build these things. And then the take rate is not huge. So do they want to, you know, take on this responsibility to hire four or 500 software engineers to take on this massive undertaking for, you know, something that they might screw up that might lead them to earn less on their advertising that, you know, these companies are going to get better and better and better at as they continue to iterate.

So, you know, that's always out there. I mean, it's certainly up to Magnite to win the business and keep the business by earning the right to do that. But it kind of comes down to that buy versus bill. and what we're seeing today just does not suggest that that's something that they're thinking of. Can I ask you the question one different way? One of the great things of exchanges is, hey, we charge you more, but you will get more if you trade with us anyway, right? So the net to you is actually a lot cheaper if you trade with us.

And that's part of the buy versus bill too, right? Like theoretically, could Walmart try to build their own Visa-style card network? I mean, yeah, they've got tons of volumes they could try. But, you know, trying to build it, it's going to be a disaster for a lot of different ways. Maybe that's not the best example. I'll think of a good example, either offline or by the end of this. But I do wonder, like, you know, a trade desk could go to a lot of their suppliers that, hey, work with us. Even though we take 10%, because we match you up with so much better people, we're so much faster.

Maybe we get better pricing because we're so big we can lean on people for you. You're actually paying us net less than you would if you went with the cheapest. cheapest person. Does MapDite have any of that where they go to Disney be like, hey, you know, because we get so much advertising as we've scaled you plus Netflix, plus, you know, our hundred other people, we have so much inventory. We can get like pick the best invents for you for you. And even though we take 5% and a different person might take 2.5% or if you internalize it, you kind of get zero, even though you have to think about all the engineers you car, like we're going to get you 20% better pricing. So our 5% is an absolute bargain.

Do they have that working for them? that's what I think that they're creating, right? And part of that is sort of magnate did the buy and build, right, by buying off the other competitors in the SSP-CTV world. So it appears to be going the direction in which they will have the power to be able to do that. I don't think that they have much of an interest in playing, you know, that card where they're wanting to, you know, take their take rates up for their big customers currently. I think they're very much in the land phase of land and expand. So, you know, this is sort of what you see is the switching cost. You know, the software behind the SSP layer in terms of how you match up what ads need

to go where, the potting, you know, all that stuff is pretty difficult. So, you know, by by them sort of aggregating all of that demand in one place, the switching costs that go behind it, it just makes it more and more difficult for not a huge, huge market opportunity for somebody like Netflix. I have three questions, and I realize we're running close to an hour, but they are big ones. But only three questions left, but they're big ones. Let's start with the first. Why isn't this growing faster, right? I hear they land Netflix.

I understand it'll take a while to really onboard them. they've got Disney. Advertising dollars are switching here. To my knowledge, Americans are spending more and more time, streaming, watching videos, all that sort of stuff. But, you know, H1, revenue up, let's just round it to 10%. EBDA up, it's rounded to 15%. Like, yeah, I've got a lot of companies where if they, if revenue was up 10% and EBDA was up 15%, I'd be, you know, shooting fireworks into the sky. But when I look at, you know, all the things we're talking about here, I'm a little surprised revenue in EBITDA that's low.

So why aren't we seeing a little bit more of the flywheel spending, if that makes sense? Yeah, totally. It's a fantastic question. I left that out of sort of how and why is this bargain created or this mispricing would come about. And that's part of it. And it has to do with the way that the market is developing. So what you're seeing, I think we're still just talking about the CTVP. So I'll keep it there.

you know, the return, the dollars through the pipes, the spend on the magmite ad platform has been about 20% most of one age. But, you know, the DV Plus business was up 12%. So in the most recent quarter and probably a little bit lower in the first quarter. So there's a bit of a gap there, right? And that's created, I think, some questions for people, for everybody, investors, et cetera. And what you're seeing is they're winning, you know, with the Netflix and, you know, with, well, not Roku, but some of the bigger players, the more premium ad inventory is coming on board at a lower take rate. And, you know, if we get at, let's say we're having this conversation next year, it's likely that that take rate has come up a little bit because

that, you know, the inventory is getting valued a little bit better and they're winning. many newer pieces of business where they're going through more of the full pipe offering. So, you know, some of the ad server business that they're winning from sort of the linear broadcast sort of legacy folks, that's coming on board at a lower tape rate because, you know, they're just placing ads and it's just kind of coming in through. these companies are still learning how to get the programmatic bidding and advertising you know know how embedded into their into their ads where somebody like roku you know they're already doing like their ads are already 78% programmatic so you know magnet is big with roku

they're getting higher calories sort of wins coming through their their pipes with roku with roku Whereas some of the people that they've been winning with recently are still kind of scaling up. So, you know, I would just say there's a bit of a gap currently between the dollars flowing through the pipes and then their actual revenues. And that has to do with the take rate and the mix. And it looks like those will be sort of tailwinds from here going forward. I was watching a Monday night football game the other day. And the thing that always jumps out to me whenever I watch anything on ESPN. And I don't know if Magnite handles the ESPN side of Disney or not.

But I think this question may be a nicer version of it, but I think this question would apply either way. The thing that always jumps out to me when I watch an ESPN product is how dumb the advertising is. And I don't mean that in the sense to advertise you dream ad, ESPN every time I watch it on streaming, right? Not on, I'm a cord cuter. I only watch it on streaming. It's the same five ads over and over again for the entire product.

And it's even dumber than that because I was watching a Monday night football game and they advertise for the U.S. Open. The U.S. Open had ended the day before, and I got hit with an advertisement for the U.S. Open 30 times. So, I mean, if I could hop in a time machine and go back and use the results to go better on it, I'd happily watch it. But I just want to ask, you can tell me that ESPN is not the Magnite product. That's fine.

But I have been a little disappointed, especially when Amazon got it, I thought we'd get personalized ad targeting at this point, right? And that would really start to unlock it, right? they'd be like, hey, Andrew lives in New York City. He doesn't have a car. He never searches for new cars. Let's save GM two bucks advertising to him and hit it to Mitchell, who lives in the South and might be ready to upgrade his car.

And let's instead hit Andrew with, they don't really advertise fantasy books on ESPN broadcast, but let's end it with fantasy books podcast because he buys those like they're going out of style, right? So my two questions are why you can ignore the ESPN one, but I don't think Netflix or Disney or any of these guys, like why haven't they got him more? personalized. And is Magnite the key to starting unlocking that or is there something else? Because if Magnite's the key to unlocking that, I can imagine a whole heck of a lot of upside as they kind of really start tackling into that. Though my question to you would be,

we're in 2000, we're in the year of our lore, 2004. Why can't we have this unlocked already? So through a lot of outage again, I'd love to hear your thoughts on all that. Yeah, great question. I mean, I would just say, again, kind of like how I answered the last one. I mean, if we're having this conversation this time next year, I think that stuff's going to be a lot. farther along. So, and again, going back to those points. But you do think Magnite is in the key position to start unlocking that versus, I could imagine, hey, you know, the data says that Netflix, Netflix is the person and the magnate is just the dump pipes that runs through. But you think Magnite is going to be a key piece of that because that's a lot of value they can capture.

It is. And so, you know, ESPN, the more and more of this goes on, right, ESPN is going to have more data about their customers. And so they're going to get better with their targeting. And so Netflix presumably already has a lot of this data, right? So maybe they're a little bit further along than somebody like ESPN would be. But yeah, that's what, you know, if you just think about where they're coming from and where they're going, yeah, that's where they're going. But, you know, if Netflix had no ad, no pay-to-ad subscribers, you know, nine months ago, for them to already be there with this stuff, you know, just now, what would be moving?

pretty quick. So it's just part of the uptake cycle, and I would expect for these things to be improving pretty significantly in terms of, and that's a big part of the bull case, right? Is, you know, these advertisers have all this first-party data, and that's kind of like the Holy Grail, right? So being able to use that to drive more targeted ads makes the ads more valuable and arguably could drive a lift to the take grade in years to come. So that's what's coming. It's just taking a lot on fold. The ads are a little stupid in the meantime. Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that could transform your workflow, Delupa. Delupa delivers perfect historicals for thousands

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I realize we're running close to an hour, but if you've got five minutes of the left time, first, the bare case I hit everyone with, aside from some of the other questions, have this, I look at it. I'm like,

look, you see it. Ryan sees it. I've got some friends who I would consider some of the most sober-minded analytical investors I know, who when I talk to them about magnate,

they're like, magnites go into the moon, wind moon, magnetite, right? And so we see this big upside case. And we haven't even talked about DOJ. I'm going to get there, but Ryan did such a great job. You know, if we skimp on that a little bit, that's fine.

They see this huge upside. The puck's moving here. And then I look, the first thing I pull up is I look, insider transactions at Magnate, right? And I see just for the past four years, just let's call three, nonstop selling hundreds of thousands of dollars every quarter by, you know, up and down the C-suite. I see the CEO, the C-R-O, the C-P-O, the C-P-O, the C-O, the C-P-O, the C-O, the C-F-E-E-E-E-E-F, the C-E-E-F. FO, the C-O, I don't know if there's any more C's to go with that, that, right? So I guess my question is, insider sell for a lot of reasons. We all know that.

But when you see the pot of gold that could be this big at the end of the rainbow, and then you see this consistent amount of insider selling across the board, I just kind of looked at them like, what are they seeing that we're not, or why are we seeing something that they don't seem to be seen? Yeah, it's a great question. And something we think about, you brought the good question. today. This is good. Yeah, think about it a lot. I mean, SBC, stock-based comp, options, restricted shares is a big piece of everybody's compensation here. So you see this with other companies that

are similarly structured. We think about it. But yeah, I mean, that's, we try to, try to overweight sort of what we're seeing with facts on the ground and, you know, our other due diligence efforts and kind of go accordingly. We don't have to touch on it too much because, again, I hate to include a third party's research, but Ryan did a great job. I'll include a link to it in the show notes. But a big

piece of the upside case here is the Google DOJ antitrust case. And if the DOJ wins, the implications for third parties and how much business could flow, if you just want to quickly talk through your thoughts on that, I think we'd be doing a disservice if we didn't at least touch on it. Yeah, no, absolutely. Well, the last week has been

kind of fascinating, and, you know, Google's been getting sued for, from everybody forever, right? But all of a sudden, they're starting to lose cases. So, you know, they lost the epic case, turn of the year, and it looks like they lost the last one, and this one does not appear off to be, to appear to be off to a very good start for them. It's particularly interesting to hear about how much evidence they've been destroying along the way and, you know, how the judges are viewing that and, you know, never mind the fact that they can write a two and a quarter million dollar cashier check and get a judge trial instead of a jury trial. So what I think has come out that's interesting this past week, some of the comments around the ad tech server, but just

to kind of summarize what's going on there, you know, at issue is the, view that Google created a monopoly, good for them, but then through anti-competitive means, they extended that monopoly into other elements of their business. And that is what's wrong with sort of their ad tech business. So they have the DSP through their search business, and then they bought double-click, and then basically forced all the publishers to buy from them. And if a dollar is starting over here for an ad to be placed, and it's ending up with the publisher. By the time it gets over here, it's about 50 cents, maybe 55 cents.

And so those are super normal take rates all the way through the pipes, from the SSP to the ad exchange to the DSP. It's a little hard to parse out who exactly is over-earning if they own all three pieces, and I think that's the real crux of the issue. So, you know, it looks like that business is probably not as important. the Google is, say, search is currently, and if they're going to offer some remedies, seems maybe more likely to come in this piece of the business. As for Magnite and these other SSPs that have managed to survive and, you know, thrive,

it is a monster market share game opportunity for them. In your mind, with the upside B, Google just says, hey, you're right, DOJ. We're monopoly in too many areas. we're just going to kill this piece of the business and then they basically leave all their supply up for scraps. Do they sell the business? Like could Magnite be buying the Google ad exchange? Or what do you think the remedy here would be? That's a great question. I don't know. It could be many, many things. It's hard for me to think of. I mean, I guess the business, the SSP side of the business is probably going to have like $4 billion in sales, but it hasn't

grown in the last eight quarters. So I don't know if that's, something people are lying up to buy, right? So maybe it's a spinoff. I'm not really sure what exists. There's a view in the industry that exists that just by altering sort of Magnite's ability to win in these auctions that pretty instantaneously they'll be able to win a lot more share. So they're number two, a high single-digit share. And depending on how you cut the ad network business, you know, Google is either 85% or they're 50% on just the SSP. So, you know, if some of this stuff came up for grabs and Magnite was able to, you know, pick up, you know, five or 10 points of market share, it would be very, very meaningful. Yeah. Just the casual five or 10% of a

billion dollar industry, billion dollar, 10 billion dollar industry popping up. Yeah, that's right. with exchange economics, right? So, you know, 70% 65% incremental pull-through is on new margins. So highly, highly attractive cash flows. Perfect. Anything else we should be talking about on Magnet? I think we did a pretty good job, but just want to make sure you don't think we were missing anything material. Oh, no. I mean, stay tuned, right? I think we all are trying to see what's going to shake out. And, you know, it'll be interesting. I think the real interesting thing is just think about how it plays out and

an over what time frame. But, you know, we like it because it's trading at a reasonable valuation is well managed, and CTV we feel pretty good about all these things unfolding the way we think.

And, you know, the antitrust opportunity is not something that you have to pay a lot for. I think that's the most interesting thing to me. The antitrust opportunity is, you know, a lot of these things when you'd buy them, you'd be paying some optionality value for it, whether it's 10, 20%, and then if it didn't work out, here, I could be wrong. I'm no expert. I'm a journalist. As people have said, this is a difficult and tough space for journalists to wrap their head around, but you're not paying for it. And the other interesting thing is, like, a lot of the Netflix ad-supported things to me haven't fully kicked into gear yet. Like I mentioned the NFL. The NFL games for Christmas are coming this year. So, you know, I think, as you said 12 months from now

I think you've just got a lot more Netflix volume of advertisements and I think that really starts to inflect it but yeah Mitch Scott this has been great you know it felt like four months it's been 13 months we're going to have to shorten that down to feels like one month it's been four or five months for the next podcast appearance but

Magnite Crocs this has been fantastic I appreciate you coming on for the second time and looking forward to chatting soon and having you on sooner awesome sounds good to me Andrew thanks for having me great to see you again A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.