Description

Long Magnite (MGNI) / Short Trade Desk (TTD)

We are advocating a trade long MGNI and short TTD with an investment horizon of 6 – 18 months. While both MGNI and TTD benefit from certain multiyear secular tailwinds, we expect specific catalysts to drive a relative revaluation of MGNI vs. TTD.

Note - we were working on this write up when Google announced at 3pm today they are partially reversing course on Chrome cookie deprecation. Figured it would be fun to get the discussion going even though a lot of this is now not current / less relevant as relates to 3P data. 

Background on MGNI / TTD:

Magnite and Trade Desk are two leading “AdTech” players that provide technology solutions to assist customers in managing their digital advertising campaigns. Magnite is the largest independent supply side platform (“SSP”) with ~ $600 million in revenue and Trade Desk is the largest independent demand side platform (“DSP”) with ~$2.4bn in revenue. TTD was written up as a long by a VIC member in 2017 and has nearly 20x’d since then as the author’s thesis that there was room in the marketplace for TTD to take share and thrive played out as TTD outexecuted all competitors and came to dominate the market. MGNI was written up as a long by agentcooper in 2021 and has been roughly cut in half since then, however we believe this was a function of the write up timing coinciding with peak market multiples as the author’s thesis that MGNI would benefit from secular tailwinds was correct and his thesis about the value of MGNI’s “hidden gem” connected TV (“CTV”) ad server SpringServe has been borne out as a significant differentiator in the marketplace.

As many readers are aware, the digital advertising ecosystem consists of “Walled Gardens” where companies with highly differentiated ad inventory and their own tech stacks extract the economics, and the “Open Internet” where companies like TTD and MGNI participate. Advertising revenue on the Open Internet consists of around 30% of total digital advertising revenue with the rest on Walled Gardens. On the Open Internet, ad spending is monetized between DSPs and SSPs with the remainder flowing down to the publishers themselves. Typical DSP take rates are ~20%+ while SSP take rates are lower at ~10%. Historically, DSPs, including TTD, have been able to extract a premium for their audience targeting capabilities that rely on profiling users based on third party data. DSPs have been more integrated with ad agency workflows, with stickiness and value add akin to an enterprise software vendor as opposed to just “commodity pipes.”

Evolution of MGNI and TTD

Over the past years, TTD has been able to out-execute DSP competitors and build a best in class platform that has essentially become the only platform of broad relevance other than Google’s DB360 and Amazon DSP. Jeff Green and co. have done an incredible job and should be commended, and TTD’s 25% - 30% CAGR throughout both good and bad advertising macros (all organic growth) attests to this superior execution. TTD has managed to take share not just from smaller rivals but from DV360, despite Google’s inherent advantages. However, at its current scale these share gains will become harder as spend on TTD is now a considerable portion of total addressable spend, with gross spending on its pipes representing ~9% of the SAM vs. <4% at the time of the bullish 2017 writeup and the low hanging fruit of share gains having been harvested. Moreover, TTD’s revenue growth from here will be dependent on the Company’s ability to maintain its high take rates, which we believe will prove difficult.

By comparison, MGNI has been a choppier performer, which we attribute largely to the different industry dynamics that have faced SSPs and DSPs. The SSP market has historically been comprised of one industry behemoth (DV360) and a scattering of relative minnows fighting for scraps, with inadequate room for players to differentiate based on their customer service, audience targeting or other capabilities to carve out a true up and comer position like TTD did in the DSP space. Even today after several rounds of industry consolidation driven by header bidding and supply path optimization (“SPO”), the SSP landscape remains more fragmented than the DSP market, and Google is an outsized participant at $10bn+ of imputed SSP revenue versus $600m for MGNI, the largest independent player and $300m for Pubmatic (PUBM).  

Though we believe MGNI management has executed at a similar level to Jeff Green at TTD, through a turnaround jumpstarted by Michael Barrett and David Day in late 2017, organic growth and stock price appreciation has been far less robust. For example, while both MGNI and TTD will have grown revenue by ~5x from 2018e to 2024e, TTD did so organically, whereas MGNI got there by deploying upwards of $1.5 billion into M&A and nearly tripling the number of shares outstanding in these acquisitions. As a result, MGNI’s share price has grown by ~7x rather than 20x, and the market currently awards TTD a large valuation premium at ~40x 2025 consensus EBITDA estimates (that call for 22% EBITDA growth) versus MGNI at 11x 2025 EBITDA estimates (that call for 15% EBITDA growth). However, we believe MGNI’s acquisitiveness has positioned the Company ideally for industry trends and see an opportunity for growth and valuation multiples at the two Ad Tech leaders to converge in the coming year.

As an aside, we believe Criteo (CRTO) is also a potential long given its successful pivot to retail media from retargeting, and its attractive valuation (~6x EV / 2025 EBITDA on flat EBITDA growth). It also seems like Criteo could make for a good acquisition for Trade Desk or an agency holding company at some point. However, with the majority of CRTO’s business still coming from retargeting, which is threatened by Chrome 3P cookie deprecation, the analysis for CRTO is more complicated and trading liquidity in MGNI is superior, making it better suited for a pair vs. TTD.

Looming Changes in the Ecosystem

For many years, both Apple and Google have been taking or planning action to “deprecate” third party identifiers used to track and profile users in response to user privacy concerns. At this point, the chief overhang looming is Google’s plan to deprecate 3P cookies in 2025, the timeline of which was pushed back earlier this year for the third time. To prepare for the deterioration in return on ad spend (“ROAS”) that is likely to result from cookie deprecation, DSPs, SSPs, identity brokers and publishers alike have been scrambling to come up with alternative identity solutions. During this process, the center of gravity has begun to shift away from the DSP / buyside to the publishers and SSPs that possess true 1P audience data. Our research suggests that publishers have been deepening integrations with SSPs and more deeply embedding the handful of market leaders into their workflows, such that Magnite / Pubmatic have leapt out of the mere “dumb pipe” category into more holistic solutions providers to their customers. Over time, we believe this trend will remain in place with further pressure on 3P targeting solutions likely in the coming years; this should provide the opportunity for scaled leaders on the supply side like MGNI to continue to differentiate and more deeply embed themselves with publishers, creating the opportunity for take rate stabilization if not expansion.

Conversely, the evolution of the SSP as value-added partner to publishers from commodity yield management solution should also witness the DSP’s relative importance diminish as the data and targeting “bells and whistles” agencies happily pay for today will seem more onerous in a lower ROAS environment. From today’s 20% / 10% DSP / SSP take rate paradigm, we believe a new normal in five years might look like 15% / 10%, though this is admittedly conjecture for now.

The CTV Opportunity, OpenPath, ClearLine and Disney Direct Connect

Earlier, we noted that Magnite’s growth has not been purely organic unlike TTD’s. After coming into a distressed situation and turning around the business, but recognizing the commoditization of the SSP space at that time, Michael Barrett and David Day acquired SSP leaders Telaria and SpotX to create a dominant platform in CTV – the segment of digital ad spending with the highest growth rates and the most opportunity to differentiate on features rather than pure cost. As Agent noted in his 2021 write up, Magnite also acquired SpringServe through the acquisition of SpotX, a CTV ad server that Magnite was able to integrate into Magnite’s CTV SSP, thereby becoming the market leading CTV platform and the only independent full stack CTV SSP with the competitive ad server Freewheel owned by Comcast / NBC.

As opposed to the fragmented and to-date relatively commoditized traditional SSP landscape, the CTV landscape is very different, with Magnite one of a short list of serious, scaled, platforms for publishers to utilize for their CTV ad serving and inventory management needs. Versus display and video, where PUBM and MGNI each have single digit share of a fragmented, market, we estimate MGNI has around 33% market share in CTV with Freewheel the next largest player at 15%. CTV is a landscape where Magnite brings significant differentiation to bear. CTV is a premium CPM market with significant “SLAs” demanded by advertisers and publishers alike, and MGNI is well positioned to meet these expectations and continue investing in new capabilities, creating a positive flywheel of scale and differentiation akin to what TTD achieved as the leading DSP for ad agencies. One example of this is in CTV for Live Sports, where MGNI’s ability to manage unscheduled demand surges via its programmatic SSP and to ensure competitive ads are properly segmented and spaced has led the company to win new business from premium publishers (most notably Netflix in recent months).

CTV is a premium market with above average growth projected at ~15% vs. overall digital advertising at ~10%. CTV spend underindexes its share of TV viewing at ~30% of spend vs. 40% of viewing hours, and 50% of CTV is still transacted non-programmatically, meaning the sweet spot of growth where MGNI participates (programmatic CTV) should be poised for sustainably higher growth than the overall CTV market in the coming years, as programmatic should continue to take share from non-programmatic as the market matures, similarly to what has been observed across the rest of the digital advertising industry. Magnite is uniquely positioned to participate in this attractive growth opportunity, as CTV in 2024 will represent nearly 50% of total revenue – as compared to TTD at ~25%. Given that it relies almost exclusively on logged in / permissioned users, CTV is also likely to be a prime beneficiary of 3P identity deprecation, which could fuel outsized growth (potentially swinging the pendulum to overindex on spend vs. viewership) in the coming years as advertisers will pay a premium for these valuable audiences. Each year CTV continues to encroach on the traditional linear cable market and it is hard to envision how this trend would reverse.

In recent years, intense focus has been on TTD’s efforts to establish “direct connections” to large publishers, bypassing SSPs in the process. In theory this would be highly desirable to save a layer of take rate and reduce transaction costs. TTD’s initiative is called OpenPath, and while it is a risk factor to monitor, traction has been quite modest since it launched in February of 2022. Just as TTD’s value proposition to advertisers has been to be the independent agent for the buyside, publishers enjoy the independent agency of SSPs knowing that their interests are being represented, and are unlikely to want to foster an ecosystem where they are increasingly dependent on only a couple of DSPs. In an environment where RAOS deteriorates, we would expect TTD to attempt to become more aggressive on the disintermediation front to secure spend and protect take rates, but we don’t see signs that OpenPath is broadening out its adoption.

In CTV, Magnite has create its own disintermediation tool, dubbed ClearLine, offering a slimmed down DSP for advertisers that want to transact programmatic CTV and aren’t using TTD. While we aren’t counting on much traction from ClearLine, we do think there are signs of potential here, including Magnite’s recent partnership with MediaOcean (https://www.mediaocean.com/press-releases/2024/03/14/mediaocean-magnite-exclusive-partnership-automate-media-planning-execution-reconciliation-streaming-tv) , and given the primacy we expect CTV to have in a post cookies world, ClearLine presents an avenue for potential upside to growth expectations.

One bearish development of note was the advent of a direct exchange feeding TTD and DV360 demand into Disney / Hulu’s inventory without Magnite’s SSP layer. Our understanding is that this exchange will spin up in 2025 and will only receive a small allocation of overall Disney / Hulu inventory (if any) while MGNI carries the lion’s share of Disney / Hulu’s business. The issue for a premium CPM environment like CTV is that publishers risk cannibalizing their CPMs by cutting out SSPs, such that there is no actual accretion from the direct connection. Most CTV publishers are not in the same situation as Disney and are also unlikely to put in the effort to create and maintain such a direct exchange, and we actually hear that Disney may be reversing course on this initiative even in the few months since it was announced. In short, we think the headline here is scary but the fundamental impact on MGNI’s business over the coming years is likely to be minor, particularly since DIS is shifting its CTV ad sales aggressively to programmatic in the coming years, to MGNI’s benefit.

Magnite’s Recent Netflix Win

MGNI stock has appreciated significantly since it was reported that Netflix was switching to Magnite from Microsoft’s Xander to power its ad-supported streaming service. The win employs both Magnite’s ad server and CTV SSP and will likely adds billions of dollars of ad spend (analysts are projecting $4 - $5bn by 2027) at healthy take rates with the ramp up starting in Q1 of 2025. Obviously, this win is a tremendous validation of MGNI’s platform and capabilities, and it is likely to lead to further market share gains over time, cementing MGNI’s dominance of the sell side programmatic space. On Netflix’s Q2 earnings call, the Company alluded to how its ad business was “not quite there yet” in terms of capabilities around measurement, personalization and relevancy, with the implication that the switch in tech platform to Magnite is directly related to its desire to improve on these metrics. We believe NFLX could potentially double the size of Magnite’s CTV business on its own in the coming years.  

Potential Antitrust Upside

Google has been in the spotlight recently with antitrust suits centered around its search and advertising business. Others have done far better work on this topic than we, so we will leave it to them to opine. However, the upshot is that in September Google will face a DOJ suit related to its ad networks business that has a high likelihood of resulting in some type of remedy that would be positive for the independent SSP landscape. Since Google’s SSP is 80%+ of the display / video market currently, this could be a very meaningful driver for upside at Magnite should remedies result. We note that while in general a Trump white house would be deregulatory, on this topic VP nominee JD Vance actually stands on side with Lina Khan and the Biden DOJ – in other words Google does not get off the hook simply through the election.

Framing the Opportunity

Given recent trends, we forecast MGNI achieving $225m of AEBITDA in 2024, ramping to $265m of AEBITDA in 2025 and $325m in 2026 on top line of ~$620m / $700m / $800m respectively. We have modest contribution from NFLX in 2025 and more material contribution in 2026, but still well below implied 2027 run rates based on $4 - $5bn of spend. We also normalize 2024 given expected political spend that will not recur in 2025, but that should help MGNI overachieve in the balance of this FY. We don’t rely on display / video / audio at all as we drive all growth in our model off of CTV and we are modeling no upside from Google remedies.

For TTD, we simply take consensus forecasts and argue that MGNI’s valuation should converge with TTD’s given the 10 – 20% upside to EBITDA estimates we expect for MGNI and the changing business quality of both players (MGNI inflecting positively and TTD negatively). Given the potential for smaller, but still positive impacts on TTD from DOJ remedies, we would weight this trade with a net long bias.

Catalyst

Positive commentary on the Q2 earnings call

Broadening out of the investor base as Magnite's derivative exposure to Netflix becomes more broadly recognized

Additional Springserve / SSP wins at other CTV providers

Take rate pressure on TTD from agencies