In a volatile year where these companies’ valuations were slashed due to COVID-19 but subsequently rebounded, which digital ad platform is a better buy now?
In the past decade, digital advertising has predominantly gone through the “walled gardens” of Google and Facebook. This is a closed ecosystem where the operator has control and causes a conflict of interest. Their dominance is coming to an end though, as these neutral and independent ad tech companies offer an alternative to the walled gardens.
Magnite Bull vs Bear Arguments
Magnite (NASDAQ: MGNI) is a company formed through the merger of Rubicon Project (ad exchange specialist) and Telaria (Connected TV or CTV advertising company). It claims to be the “largest independent sell-side platform” with notable customers such as Disney and Samsung, among others. Unlike The Trade Desk (NASDAQ: TTD), which operates on the “buy-side”, Magnite sells available slots for ads, also known as the “sell-side”.
In Q3 2020, Magnite reported a revenue increase of 62% year-over-year (YoY) to $61 million, driven by just over 50% growth in CTV on a pro forma basis (Telaria results from the year prior included). Management expects this growth in CTV to continue due to an acceleration in cord-cutting. However, on a pro forma basis revenue growth was 12% YoY, which is pretty uninspiring, but management did issue guidance which shows that it is picking up.
An exciting development is the revenue generated from its audience segments created on Magnite’s marketplace, which enables specific groups to be targeted. Last year it accounted for almost nothing, but is now roughly 10% of total revenue and expects to double by 2021. Magnite also claims to be one of the only companies that will benefit from third-party cookies being replaced by “more consumer-friendly” means in the next 18 months.
The small size of this company with a market cap of $1.1 billion means that it is more volatile than larger companies. It is also unprofitable, although this is not uncommon, reporting a net loss of $10.5 million, improving YoY on a per-share basis. Revenue growth of 12% is also disappointing for a company that is in growth mode and could be a cause for concern.
The Trade Desk Bull vs Bear Arguments
The Trade Desk is probably the most well-known advertising platform outside of Big Tech. It has grown substantially in recent years and provided some eye-popping returns. Its Q3 earnings smashed analyst expectations but is there more upside for The Trade Desk?
In Q3 The Trade Desk reported a 32% increase to $216 million due to several trends such as CTV and customers increasing their spend on the platform. It is also profitable with a net income of $62.7 million. This was a welcome return to growth after a 13% decline in revenue in Q2 due to a COVID-19 induced contraction in advertising spending. The Trade Desk also has an excellent retention rate of 95%+ historically and stated in its latest conference call that it sees no change in this.
In a survey of over 200 advertisers, 85% said they were under pressure from CFO’s to justify market spending. CEO Jeff Green also drew parallels with the 2008-09 Financial Crisis where advertisers would have to be more deliberate. The current global crisis has enabled The Trade Desk to gain more market share than any other quarter in its history.
Connected TV is a large part of the bull thesis of The Trade Desk, and Green stated that 2020 is the year “where media does three years of worth of change in one year”. Spend on its platform on CTV grew over 100% in the quarter. The cord-cutting trend continues to accelerate with cable tv packages down 7.5% YoY and enabling The Trade Desk to continue its rapid growth.
A key concern for investors may be the rich valuation with a price-to-sales of 54 compared to Magnite at roughly five times. The macroeconomic environment may also weigh on the stock, particularly in the short term, as was demonstrated in March. Larger players that dominate continue to represent a significant threat to the company but The Trade Desk has managed to navigate this thus far.
Which stock is a better buy right now?
The Trade Desk appears to be a better buy right now due to its proven track record, visionary CEO, and impressive revenue growth. Magnite does have potential, but it brings with it a higher risk and slower revenue growth. Investors should keep an eye on Magnite’s audience segment and see how it develops, but The Trade Desk looks well-positioned to prosper and drive shareholder return in the future.
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