Magnite (MGNI)

Digital advertising platform Magnite (NASDAQ:MGNI) fell short of the market’s revenue expectations in Q1 CY2025 as sales rose 4.3% year on year to $155.8 million. Its non-GAAP profit of $0.12 per share was significantly above analysts’ consensus estimates.

Company Overview

Born from the 2020 merger of Rubicon Project and Telaria, Magnite (NASDAQ:MGNI) operates the world's largest independent sell-side advertising platform that automates the buying and selling of digital advertising inventory across all channels and formats.

The sector is on the precipice of both disruption and growth as AI, programmatic advertising, and data-driven marketing reshape how things are done. For example, the advent of the Internet broadly and programmatic advertising specifically means that brand building is not a relationship business anymore but instead one based on data and technology, which could hurt traditional ad agencies. On the other hand, the companies in the sector that beef up their tech chops by automating the buying of ad inventory or facilitating omnichannel marketing, for example, stand to benefit. With or without advances in digitization and AI, the sector is still highly levered to the macro, and economic uncertainty may lead to fluctuating ad spend, particularly in cyclical industries.

Magnite competes with large tech companies that have their own advertising inventory and technology, including Google (NASDAQ: GOOGL), Meta (NASDAQ: META), and Amazon (NASDAQ: AMZN). In the sell-side platform space, its competitors include PubMatic (NASDAQ: PUBM), The Trade Desk (NASDAQ: TTD), and privately-held companies like Index Exchange and OpenX.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $674.6 million in revenue over the past 12 months, Magnite is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, Magnite grew its sales at an incredible 33.3% compounded annual growth rate over the last five years. This is a great starting point for our analysis because it shows Magnite’s demand was higher than many business services companies.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Magnite’s annualized revenue growth of 7% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Magnite’s revenue grew by 4.3% year on year to $155.8 million, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 13.8% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and suggests its newer products and services will spur better top-line performance.

Although Magnite broke even this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 12.8% over the last five years. Unprofitable business services companies require extra attention because they could get caught swimming naked when the tide goes out.

On the plus side, Magnite’s operating margin rose by 32.8 percentage points over the last five years, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.

This quarter, Magnite generated a negative 0.9% operating margin.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Magnite’s EPS grew at an astounding 94.7% compounded annual growth rate over the last five years, higher than its 33.3% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Magnite’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Magnite’s operating margin expanded by 32.8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Magnite reported EPS at $0.12, up from $0.06 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Magnite’s full-year EPS of $0.78 to grow 13.8%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Magnite has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 23.6% over the last five years. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Magnite’s margin expanded by 46.8 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Magnite burned through $11.82 million of cash in Q1, equivalent to a negative 7.6% margin. The company’s cash burn slowed from $66.28 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Magnite has shown solid business quality lately, it struggled to grow profitably in the past. Its five-year average ROIC was negative 7.3%, meaning management lost money while trying to expand the business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Magnite’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.

Magnite reported $429.7 million of cash and $616.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $208.6 million of EBITDA over the last 12 months, we view Magnite’s 0.9× net-debt-to-EBITDA ratio as safe. We also see its $13.9 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

Despite a revenue miss, EBITDA and EPS beat significantly. Overall, this print had some key positives. The stock traded up 8.3% to $13.50 immediately following the results.

Updated: July 8, 2025 at 12:01 AM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

There are multiple reasons why we think Magnite is an amazing business. For starters, its revenue growth was exceptional over the last five years. And while its relatively low ROIC suggests management has struggled to find compelling investment opportunities, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. On top of that, Magnite’s rising cash profitability gives it more optionality.

Magnite’s P/E ratio based on the next 12 months is 27.3x. Looking across the spectrum of business services companies today, Magnite’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $21.93 on the company (compared to the current share price of $24.10).