Magnite, Inc (Nasdaq: MGNI) was formed in early 2020 by a merger of two advertising technology companies – Telaria (formerly Tremor Video) and Rubicon Project. The merger was predicated on cost, and not revenue synergies, and bringing a Connected TV (“CTV”) product to Rubicon that it couldn’t build alone. Spruce Point finds evidence to suggest that both companies were hampered with business and accounting struggles prior to the merger. We believe they have continued to mask challenges with inaccurate financial reporting. Magnite’s pro forma organic sales are down -1% YTD with peers +16%. Multiple customer interviews all tell us that Magnite does not have much quality CTV inventory to currently sell. A recent subtle change in Magnite’s financial covenant from “Adjusted EBITDA” to “Maximum Cash Burn” suggests further pressures could lie ahead. Adding to concerns, Rubicon’s CEO failed to promptly disclose an SEC inquiry at Millennial Media (NYSE: MM) where he was CEO, while Magnite’s CFO held the CFO role at Spot Runner, accused in a lawsuit of running a pump and dump scheme. Magnite is being promoted by an analyst with a FINRA citation and checkered past that includes hyping the AOL / Time Warner merger, a former tech media darling that settled SEC accounting fraud charges.
We believe investors are being misguided by Magnite’s growth prospects, and see 25%-50% downside.
- Spruce Point finds evidence that Rubicon management exaggerated growth opportunities, and was failing to deliver on expecations prior to the merger. CEO Barrett destroyed tremendous value at his prior CEO role at Millennial Media, and for months failed to report an informal SEC inquiry into goodwill accounting. CFO Day held the CFO role at Spot Runner during a period WPP sued it and alleged it to be a pump and dump scheme. Telaria’s former CFO Rego blindsided investors with an accounting restatement earlier at Vonage Holdings
Dubious Financial Reporting
- We find evidence that Telaria’s capex reporting was mathematically impossible prior to its merger, and it made nearly $10m of assets inexplicably disappear at closing. Rubicon has reduced KPIs and resorted to a more aggressive interpretation of Free Cash Flow. Post-merger, evidence shows Magnite is running two separate businesses, yet only reporting one operating segment, allowing it to bury clarity into its struggles in our opinion.
Dubious Accounting And Leadership
- Both Telaria and Rubicon had prior material weaknesses of internal controls they claim were remediated, yet each recently had dismissed their auditors. Magnite’s Chief Accounting Officer (CAO) resigned in less than 2 months post close. Her departure from her two previous companies foreshadowed significant equity value decline. Magnite’s new CAO appears ill-equipped for the role. Her last accounting role was 7 years ago.
Dubious Stock Promotion
- Magnite’s shares are heavily promoted by Needham and Co, who blessed the merger with a fairness opinion. Needham’s analyst compares Magnite to an early Trade Desk, despite their business performance going in opposite directions. Analyst Martin has a FINRA citation, and was named in lawsuits related to the promotion of AOL before it collapsed and its successor was charged with fraud by the SEC and paid a $300m penalty
Excessive Valuation: Poor Risk / Reward
- Magnite is currently trading 20% over the average sell-side analyst consensus price of $21.70/sh. The market miscalculates Magnite’s true 2020 organic revenue growth of just 1.7%, and rewards it with a premium valuation of 14x sales, despite one-quarter of revenue “upside” driven by one-off benefits from the political election cycle. Absent this benefit, we estimate Q3 2020 CTV revenues declined -16% and -23% YoY an QoQ, respectively. At 6.5x-8.5x NTM sales, closer to peer multiples, Magnite would have 25%-50% downside risk ($14.75 – $20.00/sh)