Why Wall Street analysts think Magnite may be the next hot play in ad tech

Published Wed, Jan 13 202112:12 PM ESTUpdated Wed, Jan 13 20216:34 PM EST

Key Points

Analysts think ad tech company Magnite is set for a standout 2021 as it rides on the back of the booming connected TV sector.
Needham analyst Laura Martin made it her "top pick" for 2021.
Public ad tech companies Telaria and Rubicon Project agreed to merge in late 2019 as they plotted a stronger play in connected television and to bring an alternative to walled gardens like Google and Facebook, forming Magnite.

Analysts think ad tech company Magnite is set for a standout 2021 as it rides on the back of the booming connected TV sector. The company, which formed after two public ad tech peers merged last year, has caught the eye of analysts in recent months and was deemed the "top pick" for 2021 by Needham's Laura Martin. Analysts say the company is poised to benefit from the growth of the CTV space this year, while also benefiting from clients consolidating their ad spend with fewer partners. Analysts have also said that while ad tech companies originally appeared ready to suffer as a result of privacy regulations like Google Chrome removing support for third-party cookies, companies like Magnite may actually stand to benefit. Ad tech companies, including Magnite, are collaborating on new ways of targeting ads and measuring how well they work. Magnite also has its own audience segmentation offering that could help in the post-cookie era. Magnite has seen its shares stumble somewhat in the past week on the heels of a report from Spruce Point Capital Management. The firm, which among other areas focuses on short-selling, claims that the companies were "hampered with business and accounting struggles prior to the merger" and have masked those challenges with inaccurate financial reporting. The report said the firm estimates a 25-50% downside to the stock. Magnite has responded to the report, saying it contains inaccurate claims. Here's what else analysts are saying about Magnite in the year ahead: What is Magnite? Public ad tech companies Telaria and Rubicon Project agreed to merge in late 2019 as they plotted a stronger play in connected television and to bring an alternative to walled gardens like Google and Facebook . Together as Magnite, they operate a "sell-side platform." That means the company helps publishers of websites, apps, CTV channels or other digital media properties sell space across their media, whether it's ads via display or video on desktop, mobile or connected TV. The company helps them manage and monetize that inventory. It also offers applications and services for buyers like advertisers, agencies, trading desks and DSPs to buy digital ad space. Its clients include website publishers, CTV channels, mobile apps and buyers of digital ad inventory. The company, which has a market cap of $3 billion, has seen its stock grow 429% since the merger closed on April 1, 2020. But some analysts see that climbing even further. One competitor is fellow supply side platform PubMatic, which went public just last month. Magnite also competes with Google, which operates at multiple links in the supply chain, along with ad tech players like SpotX, Comcast -owned FreeWheel, Index Exchange and OpenX. It operates in the same general space as ad tech darling The Trade Desk , but in a different part of the ad supply chain since The Trade Desk operates on the buy side. Needham analysts had picked ad tech company The Trade Desk as its top pick in 2020. And Needham believes The Trade Desk serves as a blueprint of sorts for Magnite in the year ahead. "We believe MGNI is about 12 months behind TTD in terms of market share and growth momentum," analysts wrote. "... We believe that, in 2021, MGNI will successfully execute the same game-plan TTD implemented in 2020." Stephens analyst Kyle Evans told CNBC that Magnite should be able to pitch itself as the Trade Desk-like solution on the publisher side. But Magnite still has dozens of peers, and he said as long as that's the case there will still be "underfunded, desperate competitors." "TTD is the clear winner on the DSP side," he said. "They're at the point in their life cycle where being the biggest and the best is an advantage that compounds every single day. We've learned that with internet companies. When you've won, you win a little bit more every day." The report from short seller Spruce Point Capital Management released last week appeared to have bruised Magnite's stock somewhat. The report says it has found evidence that Rubicon management has exaggerated growth opportunities. It also says CEO Michael Barrett "destroyed tremendous value" at his last role at Millennial Media, and failed to report an informal SEC inquiry into goodwill accounting. The report said Magnite, as of publish, was trading 20% over the average sell-side analyst consensus price of $21.70. "We take issue with the report and believe it contains a number of inaccurate claims," Magnite said of the Spruce report in a statement. "We stand by our financial reporting and look forward to sharing our results on our next earnings call." And other analysts haven't appeared to have similar concerns with the company or its CEO. For instance, in a December note, Susquehanna analysts said they view Barrett as the top CEO in the SSP space. "When he joined The Rubicon Project in 2017, the company was under take rate pressure and bleeding cash," they wrote. "In a relatively short period of time, he was able to renegotiate better deals with tier 1 publishers (which is no easy feat), move the company away from deals with lower-tier agencies, and perhaps most importantly position the company for the CTV opportunity via the TLRA merger." Those analysts reiterated that point in a note early this week amid the pullback, and said the drop "offers a second chance to buy one of the best public market ways to play CTV." Connected TV Connected TV has been a white-hot sector in the pandemic, which dramatically accelerated what industry experts thought would be a multi-year transition to CTV. The more people home and streaming ad-supported movies and shows, the more opportunities there are for ad tech partners to show them ads on platforms. For its part, Magnite has said that its total CTV revenue grew over 50% in its third quarter year-over-year, and that the number of advertisers using Magnite's audience targeting features grew two and a half times between its third quarter in 2019 to the same period in 2020. Magnite says it has an exclusive relationship with Hulu and Disney. It also works with other services like Sling TV, fubo TV, Philo and Pluto TV. It also partners with broadcast channels on their CTV app offerings, including Fox and Discovery. Susquehanna Financial Group analyst Shyam Patil said it can be hard for supply-side platforms to differentiate if they have the same inventory that everyone else has. "An exclusive with Hulu is definitely a huge deal," he said. And upward CTV trends look like they're on track to continue this year in a big way, Parks Associates senior analyst Kristen Hanich said. "We saw massive cord-cutting among consumers in the past year," she said. "Parks Associates estimates that between Q4 2019 and Q4 2020, nearly 10M US households cancelled their traditional pay-TV service. These cordcutters either transitioned to new, app-based OTT pay-TV services such as YouTube TV, FuboTV, or Philo, or decided to go without pay-TV entirely." Where eyeballs go, ad dollars follow. "It's going to be the most interesting pocket of growth in the space for the next five to ten years, if not longer," Patil said. Consolidation Craig-Hallum analysts said in November they believed Magnite shares were finally getting investor attention after strong results, guidance and hitting the conference circuit. The wrote that one of the most substantial drivers would be the consolidation of ad spend. Though historically advertisers worked with a slew of supply side partners, there's been a trend of limiting that spend to fewer partners. "No advertiser or agency wants to do business with 60 different SSPs," Stephens' Evans said. "You're creating inefficiencies at best, and fraud at worst." That's also a trend seen by peer PubMatic. That company said last month some of its own customers work with 70 or 80 different platforms but are seeking fewer partners. The change is driven by a desire for transparency in the supply chain, content and fee transparency and quality of inventory, PubMatic CEO Rajeev Goel said last month. At the Needham Growth Conference earlier this week, Magnite CEO Michael Barrett said the consolidation is well underway. He said publishers are especially wanting an option where they don't have to give their money to competitors that own inventory. "If you fast forward three years from now, you're going to see one dominant independent supply side platform. And that will be Magnite," he said. Identity When Google said last year it would be phasing out support for third-party cookies, the announcement immediately weighed on shares in the ad-tech space. Investors wondered whether the change would have grim effects on certain advertising companies. Fast forward, they're thinking very differently. "In 20 years of doing this job, this was probably the most rapid and interesting about-face for investor sentiment that I've ever seen," Stephens analyst Evans said. Identity solutions like Unified ID 2.0 , which The Trade Desk is leading and Magnite is collaborating on, and LiveRamp 's " Authenticated Traffic Solution " are potentially better than what cookies ever offered, some analysts think. "It kind of looks like we're going from a 'maybe the consumer wins but adtech and the publisher loses' to now it looks more like a win-win-win," Evans said. Magnite also has its own audience segmentation tools for ad targeting. The company said on its third quarter 2020 call that 10% of its revenue was generated from audience segments it creates on the Magnite marketplace, and believes related revenue will more than double by the end of 2021. Craig-Hallum analysts wrote in a November note that the audience segmentation offering will be a powerful tool for advertisers if consumer registration with email addresses doesn't recognize significant adoption in early days. "Our checks have indicated less than half of consumers are likely to register accounts with publishers in the weeks and months that follow [third-party] cookie removal, providing a larger opportunity for audience segmentation," they wrote. CNBC's Michael Bloom contributed to this report. Disclosure: Comcast's NBCUniversal is the parent company of Universal Studios and CNBC.

Michael Barrett, Magnite CEO.

Magnite

Analysts think ad tech company Magnite is set for a standout 2021 as it rides on the back of the booming connected TV sector.

The company, which formed after two public ad tech peers merged last year, has caught the eye of analysts in recent months and was deemed the "top pick" for 2021 by Needham's Laura Martin. Analysts say the company is poised to benefit from the growth of the CTV space this year, while also benefiting from clients consolidating their ad spend with fewer partners.