2020 was a breakout year for two future players in the digital advertising market. Magnitt (NASDAQ: MGNI) is the world’s largest independent sales site for sales side, with a strong focus on connected TVs. Roku (NASDAQ: ROKU) is the country’s best streaming platform, which connects viewers with the streaming services they love. Both generate most of their revenue from digital advertising. What is a better investment opportunity?
On this clip from Motley Fool Live recorded on December 16, 2020, “The Wrap”
Danny Vena: Well, let me start by saying that I own both shares, and I have owned both shares for quite some time. So this is nothing new, and I want to say that since these are smaller businesses in the big scheme, I think both can do remarkably well from here, but this is going to be one of those cases where I have to take something of a better buying approach.
I start by saying: I think you should own both businesses. That said, let’s take a closer look at what they do, and who they are, and whether one of the two is a better investment opportunity. Now I will say that I have an answer that goes in, but I want to show people some of the calculations and some of the other things that are related to the companies, so that they can get an idea of where I come from.
The first thing I should do is share my screen here because I think this is quite interesting. If you look at this chart, the price chart so far this year for both of these stocks is one up 140%, it’s Magnite, and Roku’s up 144%. If you look at the two, both up around 140%, you might be thinking “Hey, look at that,” but let’s look a little further now.
The first thing I want to do is look at what the next 12 months’ earnings have done. You can see that in the last 12 months, Roku has generated $ 1.5 billion in revenue, while Magnite has generated $ 188 million in revenue. We are talking stocks that are in two completely different playing fields here. Just to further emphasize that if you look at the market value, Magnite has a market value of just over $ 2 billion, with Roku having a market value of $ 43 billion. Again, these are two companies of different sizes here.
That said, I want to look at the changes over the last 12 months, and you can all see that Roku has actually increased revenue. Sorry, it’s years to date. Let’s go to the next 12 months. Roku has increased its turnover by around 36%, while Magnite has increased its revenues by 20%.
Now it’s important to note that both of these companies – it may not look like that – you think of Roku, you think of streaming devices, and you think of Magnite, Magnite works like a digital advertiser, but they actually overlap quite a bit in the room where they operate.
Roku makes 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 ad-supported channels as[[[[Disney‘s]Hulu, or you can get subscription channels like Netflix and Amazon Prime. They’re all there. Right now there is a big holdout[[[[AT&T‘s]HBO Max, but we expect to hear about an agreement between HBO Max and Roku at any time now. (Author’s note: This agreement has already been made.)
The majority of their revenue comes from what they call the platform segment. What the platform segment does is that it handles advertising, the Roku channel and also the Roku operating system. Now Roku developed its own operating system for connected TVs, and it built from scratch, which was very different from what many competitors had done with their streaming devices. What they had done was take a mobile app and use it again. By rebuilding it from the ground up, Roku allowed them to have a much better product, and they have licensed this to an increasing number of connected TV manufacturers.
The reason why it’s important is that right now, if you go back over the last year, the Roku operating system was found in one in three televisions sold in the United States and one in four of every television sold in Canada. So they have a massive operating base.
Let’s talk for a moment about what Magnite does. 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 computers and sophisticated algorithms to match available ad slots. Say on ABC News, for example, they may have a place to advertise at seven o’clock, and what they do is help match the existing ad inventory with these tracks.
Now people think a lot Trade Desk (NASDAQ: TTD). The Trade Desk actually operates on the other side of the coin. Trade Desk operates on the buying side, while Magnite operates on the sales 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 is that I will never see Magnite grow as big as Roku is.
A few more quick calculations, and so we call it here. If you look at what the price-to-sale ratio is for Roku, 27 times today’s sales. Magnite is only about 8 times today’s sales. Magnite is much more of a bargain, Roku is more of a high risk, high reward opportunity.
After looking at these things, I want to say that between the two, I think Roku has a lot longer to go. I think it has a much greater market opportunity, because in essence, Roku’s total addressable market will be any TV channel, whether it has advertising or not. So it’s a big addressable market. While Magnite is limited to one side of the equation and in a much more fragmented market, they do not have as much market opportunity as Roku is. That said, between Roku and between Magnite, I would choose Roku.
Jason Hall: I’m torn and have a little skew here because I do not own Roku and I own Magnite. I think you can go right either way. To your point as you did before, I think they are both worth owning, even though I still have not bitten the bullet and bought Roku. But you make a really compelling case.