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Magnite (MGNI -1.00%) posted its first quarter earnings report on May 4. The advertising technology company’s total revenue rose 94% year over year to $118.1 million, beating analysts’ expectations by $11 million. Its revenue after excluding traffic acquisition costs (ex-TAC) grew 79%. On a pro forma basis, which normalizes the year-over-year comparisons for its acquisitions, Magnite’s ex-TAC revenue increased 15%.

On a generally accepted accounting principles (GAAP) basis, Magnite’s net loss widened from $12.9 million to $44.6 million as it integrated its recent acquisitions. However, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 208% to $28.8 million, while its adjusted EBITDA margin rose from 15% to 27%. Its non-GAAP earnings per share (EPS) of $0.08 also met Wall Street’s expectations.

Image source: Getty Images.

Magnite is still growing, but its stock remains roughly 85% below its all-time high from last February. Should investors accumulate some shares of this beaten-down ad tech stock?

Cutting through all the noise

Magnite’s quarterly reports can be confusing because they contain a lot of noise from its mergers and acquisitions. To recap, the current company was created by a merger between The Rubicon Project and Telaria in 2020.

That merger created the world’s largest independent sell-side platform (SSP) for digital ads, and it planned to rely heavily on the expanding connected TV (CTV) advertising market for most of its future growth. It subsequently acquired SpotX and SpringServe in 2021 to further expand its video advertising business, and it bought Carbon earlier this year to expand its portfolio of publisher monetization tools.

However, those acquisitions created a confusing gap between its reported and pro forma revenues. Its acquisition of SpotX also came with traffic acquisition costs, so Magnite added the ex-TAC metric after that deal closed in the second quarter of 2021.

Simply put, the clearest gauge of Magnite’s health is its growth in “pro forma ex-TAC” revenues, which decelerated in the second half of 2021 but stabilized in the first quarter of 2022:

Growth (YOY)

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Reported Revenue

67%

139%

116%

97%

94%

Pro-Forma Revenue

18%

79%*

26%*

10%*

15%*

Data source: Magnite. YOY = Year-over-year. *Ex-TAC basis.

Magnite expects its ex-TAC revenue to rise 23% to 26% year over year in the second quarter, and to grow by at least 20% to exceed $500 million for the full year.

The company also maintained its goal of generating more than 25% annual revenue ex-TAC growth over the long term.

On the bottom line, it expects its adjusted EBITDA margin to rise sequentially and year over year to a midpoint of 33% in the second quarter, and it reiterated its long-term goal of maintaining adjusted margins of 35% to 40%.

Is the CTV business recovering?

Magnite serves mobile, desktop, and CTV ads, but it expects CTV ads to drive most of its future growth as the other two markets mature.

Magnite’s CTV business struggled in the second half of 2021 as the ongoing supply chain disruptions throttled its ad sales to automakers and other affected sectors. Yet that closely watched business — which doubled its weight on Magnite’s top line (from 20% to 40%) over the past year — bounced back with accelerating growth in the first quarter:

Period

Q1 2021

Q2 2021*

Q3 2021*

Q4 2021*

Q1 2022*

CTV Revenue Growth (YOY)

32%

108%

51%

23%

27%

Percentage of Total Revenue

20%

34%

38%

38%

40%

Source: Magnite. Pro-forma. *Ex-TAC basis.

Magnite expects to face additional supply chain headwinds throughout the year, along with challenges in Europe related to the Russo-Ukrainian war. But on the bright side, it also expects the recovery of other sectors — especially travel — in a post-lockdown world to offset those headwinds.

As a result, Magnite expects its CTV ex-TAC revenues to rise 21% to 25% sequentially in the second quarter. It didn’t provide any year-over-year guidance on a pro forma basis, but it will likely face a challenging comparison against its triple-digit growth in the second quarter of 2021.

A confident outlook with a cheap valuation

CEO Michael Barrett said Magnite’s growth would accelerate in the second half of the year with “many contributing growth drivers” — and that the “biggest opportunities in the CTV market are still ahead of us.”

With a market cap of $1.2 billion, Magnite trades at just over two times this year’s sales. The Trade Desk (TTD -2.26%), which sits on the opposite end of the ad supply chain as the world’s leading independent demand-side platform (DSP), is growing slightly faster than Magnite but trades at 13 times this year’s sales. Like Magnite, The Trade Desk expects to profit from the secular growth of the CTV market.

Simply put, I believe Magnite’s stock is absurdly undervalued right now. The temporary slowdown of its CTV business clearly rattled investors earlier this year, but its confident outlook for the rest of the year indicates it could still generate massive gains for investors who tune out all the near-term noise.