2020 was a breakthrough year for two emerging players in the digital advertising market. Magnet (NASDAQ: MGNI) is the largest independent advertising platform in the world, with a strong focus on connected TVs. Roku (NASDAQ: ROKU) is the country’s best streaming platform that connects viewers with the streaming services they love. Both generate most of their revenue from digital advertising. Which one is a better investment opportunity?
On this clip from Motley Fool Live recorded on 16 December 2020, “The Wrap” presenter Jason Hall and Fool.com contributor Danny Vena discussed the changing ad tech landscape and why some players are better positioned than others.
Danny Vena: Let me first start by saying that I own both shares and that I have owned them for some time. So this is nothing new, and I would say that since these are smaller businesses in the big scheme, I think both of these could do remarkably well, but this is going to be one of the cases where I’m going to take something of a better buying approach.
I will start by saying: I think you should own both businesses. Having said that, let’s take a closer look at what they do and who they are, and whether either is a better investment opportunity. Now I will say that I have an answer, but I want to show people the criteria and other things regarding the companies so that they can have an idea of where I come from.
The first thing I’m going to do is I’m going to share my screen here because I think it’s pretty interesting. If you look at this chart, the price chart for both of these stocks to date is one with 140% higher, that is Magnite and Roku with 144%. If you look at the two, both by about 140%, you might think, ‘Hey, look at that,’ but let’s look a little further now.
The first thing I want to do is look at what their 12 month long income did. You can see that Roku has generated $ 1.5 billion in revenue over the past 12 months, while Magnite has generated $ 188 million in revenue. We are talking here about stocks in two completely different playing fields. Just to further emphasize that, if you look at the market capitalization, Magnite has a market capitalization of just over $ 2 billion, whereas Roku has a market capitalization of $ 43 billion. Again, these are two different companies here.
That said, I want to look at the changes over the last 12 months, and you all see that Roku has actually increased its revenue. I’m sorry, it’s year-to-date. Let’s go to the next 12 months. Roku increased its revenue by about 36%, while Magnite increased its revenue by 20%.
It’s important to note that both of these businesses – it may not seem like it – you think of Roku, think of streaming devices, and of Magnite, Magnite functions as a digital advertiser, but it actually overlaps a bit in the space where they work.
Roku earns most of its money from digital advertising. It has a streaming platform, and users can choose apps from thousands of different streaming channels. You can get your regular channels supported by ads[Disney‘s] Hulu, or you can get subscription channels like Netflix and Amazon First. They are all there. Now, at the moment, the big point is [AT&T‘s] HBO Max, but we expect to hear one day about an agreement between HBO Max and Roku. (Authors note: this transaction has already taken place.)
The bulk of their revenue comes from what they call their platform segment. What the platform segment does is that it handles the ads, the Roku channel and also the Roku operating system. Now Roku has developed its own operating system for connected TVs and built it from the ground up, which was very different from what many competitors did with their power devices. What they did was they took a mobile app and used it again. By rebuilding Roku from the ground up, they were able to have a much better product, and they licensed it to a growing number of affiliated TV manufacturers.
The reason this is important is because the Roku operating system is currently found in one in three televisions sold in the United States, and in every four in every television sold in Canada. They therefore have a massive operating base.
Let’s talk for a moment about what Magnite is doing. Magnite is actually the leading company, they are the largest independent, programmatic advertising platform on the sales side. Now it’s a mouthful. Programmatic advertising uses high-speed computing and sophisticated algorithms to match available advertising slots. Say on ABC News, for example: they may have a place to advertise on the news at seven o’clock, and what they do is help match the existing advertising inventory with the slots.
Now people think a lot about it The commercial bank (NASDAQ: TTD). The Trade Desk actually works on the other side of the coin. The Trade Desk is on the buying side, while Magnite is on the selling side. The sales side is much more fragmented. The fact that Magnite is much smaller, I think it has many opportunities to grow, but what I do not think, I think we will never see that Magnite will grow as big as Roku.
A few quick metrics, and then we mention it here. If you look at what the price-to-sales ratio is for Roku, 27 times the current sales. Magnite is only about 8 times more than current sales. Magnite is much more of a bargain share, Roku is more of a high-risk high-reward opportunity.
After looking at things, I would say that I believe between the two that Roku should go much further. I think it has a much bigger market opportunity because Roku’s total addressable market is in fact any television channel, whether it advertises or not. It is therefore a large addressable market. While Magnite with Magnite is limited to one side of the equation and in a much more fragmented market, they therefore do not have as great a market opportunity as Roku. Having said all that, between Roku and between Magnite, I would choose Roku.
Jason Hall: I’m torn and have a bit of a bias here because I do not own Roku and also Magnite. I think you can go either way. To your point you made earlier, I think it’s both worth owning, even though I have not yet bitten the bullet and bought Roku. But you make a very convincing case.