NEW YORK, Jan. 7, 2021 /PRNewswire/ –Â Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed and expansive report entitled “A Repellent Investment” that outlines why shares of Magnite, Inc. (NASDAQ: MGNI) (“Magnite” or the “Company”) face up to 50% downside risk to under $14 per share. The full report can be downloaded and viewed at www.sprucepointcap.com. Follow us on TwitterÂ @sprucepointcapÂ for additional information and exclusive updates.
Magnite was formed in early 2020 following the merger of two advertising technology companies: Telaria Inc. (“Telaria”, formerly Tremor Video) and The Rubicon Project, Inc. (“Rubicon”). The merger was predicated upon cost savings â€“ instead of revenue synergies â€“ and to the anticipated scaling of a Connected TV (“CTV”) product, which Rubicon could not build alone. CTV advertising has become increasingly popular with the rise of streaming and web-based content distributors such as Hulu, Disney (NYSE: DIS), Netflix (NASDAQ: NFLX) and Roku (NASDAQ: ROKU). However, our research indicates that Magnite currently lacks the depth of quality CTV inventory to adequately scale.
Spruce Point believes Magnite’s ~400% share price appreciation since the onset of the COVID-19 pandemic is completely unjustified. It appears that the market has largely overlooked the Company’s clear growth headwinds and highly-questionable management team, which we believe has been masking business challenges with inaccurate financial reporting. We believe our research shows that management is running two separate businesses, but structuring Magnite’s financial reporting as if the Company has a lone operating segment. We believe that this dubious reporting style may be allowing Magnite to conceal challenges that have seen Magnite suffer pro forma revenue decline by 1% year-to-date, while public industry peers The Trade Desk (NASDAQ: TTD) and PubMatic (NASDAQ: PUBM) grow 16%.
A high-level overview of some of the detailed findings in Spruce Point’s downloadable report includes:
Prior to the merger, publicly-available material indicates that both Telaria and Rubicon were hampered with business and accounting struggles. Telaria issued warnings about potential material weaknesses, including in its last 10-K filing, and its reported capital expenditures were negative prior to the merger. Most concerning, however, is our discovery that Telaria made nearly $10 million of assets and liabilities inexplicably disappear from its preliminary closing valuation. Evidence also shows that Rubicon was under severe pressure pre-merger, failing to deliver on expectations with its apparently exaggerated growth opportunities. We believe this explains why Rubicon sought to merge with Telaria, which had at least one revenue driver (CTV). Rubicon stopped regular reporting of key metrics such as Ad Spend and Take Rate and changed its Free Cash Flow to a non-standard calculation in our view. Spruce Point always warns investors to be cautious when key disclosures disappear or when key metrics change.
Post-merger, evidence suggests Magnite is struggling and running two separate businesses while only reporting one operating segment. We question what management is hiding with two separate businesses and only one set of financials, especially given that at the very onset of the merger, management made clear that both businesses were “quite different” and would function as two separate business units on two separate platforms. Instead, Magnite’s website provides unique login portalsÂ for Telaria and Rubicon, respectively. We also discovered that Telaria still has its own employees â€“ including in financial and accounting roles no less â€“ demonstrating that Magnite appears to be misrepresenting and misreporting its business by running two separate businesses behind the scenes. We also find that pro forma revenue results do not add up when combining Telaria and Rubicon reported revenue. As another sign that something is dramatically wrong, Magnite’s pro forma organic sales are down 1% year-to-date 2020 with peers up 16%. We estimate Magnite’s pro forma operating cash flow is down 143% year-to-date 2020.
Evidence suggests Magnite likely faces significant business headwinds, which are not properly reflected in its currently inflated share price.Â Despite management’s historical and future growth story claims, we believe that the 2020 election cycle had an outsized impact on recent Q3 2020 results, adding an estimated $5 million revenue benefit to its highly promoted CTV business. Absent this one-off contribution, we estimate CTV revenue would have declined 16% on a year-over-year basis. We believe Magnite faces business headwinds due to increased customer concentration with XUMO, Pluto and Hulu all coming under control recently by larger corporations. In our experience, rarely is it good news for small vendors when large corporate behemoths acquire smaller, more entrepreneurial companies. Finally, creditors changed Magnite’s financial covenant from “Adjusted EBITDA” to “Maximum Cash Burn” suggesting that further pressures could lie ahead.
- We believe Magnite is led by a highly-questionable, unimpressive leadership team.
An Ineffective CEO:Â Before joining Rubicon as its Chief Executive Officer, we believe Michael Barrett destroyed value and failed to promptly disclose a Securities Exchange Commission (“SEC”) inquiry regarding goodwill impairment accounting in his prior role as Chief Executive Officer at Millennial Media (NYSE: MM). This discovery â€“ paired with Rubicon management’s exaggerated growth opportunities pre-merger â€“ leads us to believe that Mr. Barrett is unfit to serve as Magnite’s leader.
A CFO with a Questionable Past:Â Magnite’s Chief Financial Officer, David Day, has an unimpressive and suspect track record. While holding the Chief Financial Officer role of Spot Runner, the advertising and tech company faced a lawsuit from WPP plc (OTCMKTS: WPPGF), which alleged Spot Runner of orchestrating a “pump and dump” scheme.1
An Inexperienced and Ill-Suited Chief Accounting Officer:Â With Magnite having recently attained a multi-billion dollar market capitalization, we find it alarming that recently appointed Chief Accounting Officer Shawna Hughes has not held an accounting role since 2013. Shockingly, she recently held human resources leadership roles.
- We believe analysts have wildly marked up Magnite’s sales expectations largely on the back of a single quarter and promotion from an analyst with a checkered past.Â Magnite’s shares are heavily promoted by Needham & Company (“Needham”), which blessed the merger with a fairness opinion. We believe that Needham analyst Laura Martin incorrectly models revenue growth as increasing 36% on a year-over-year basis due to an understated pro forma revenue base, when our calculations estimate that Magnite’s true 2020 expected organic growth is a meager 1.7%. In addition, we believe Ms. Martin incorrectly compares Magnite to an early The Trade Desk (NASDAQ: TTD) in terms of market share and growth. Our research suggests this is a long shot. Investors should be aware that legal documents show that Ms. Martin played a role in promoting the 2000 AOL/Time Warner merger, which later settled SEC accounting fraud charges. Legal documents alleged that Ms. Martin was willing to write glowing commentary on AOL so as not to offend management though she was aware AOL was engaging in accounting gimmickry. We believe investors should be incredibly wary of Needham’s steep price targets on Magnite and conduct their own independent due diligence.
It is also notable that insiders have also been sellers of Magnite shares, which should give investors serious pause. If these insiders were so bullish on the Telaria-Rubicon merger, we believe they would have been buying stock cheap ahead of the recent price increase, not selling.
Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point’s full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.sprucepointcap.com.
Spruce Point has a short position in Magnite, Inc. (NASDAQ: MGNI) and owns derivative securities that stand to benefit if its share price falls. Spruce Point also has long positions in PubMatic (NASDAQ: PUBM), The Trade Desk (NASDAQ: TTD) and Roku (NASDAQ: ROKU) which stand to benefit if their share prices increase.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities. Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
Spruce Point Capital Management
[emailÂ protected]Â Â Â
1Â Spot Runner Is Accused of Fraud, The Wall Street Journal (April 2009). Note: Mr. Day was not specifically named in the lawsuit.
SOURCE Spruce Point Capital Management, LLC