2020 was a highlight year for two emerging players in the digital advertising market. Magnite (NASDAQ: MGNI) is the largest independent advertising platform for sales in the world, with a strong focus on connected TVs. Roku (NASDAQ: ROKU) is the main streaming platform in the country, connecting viewers with the streaming services they love. Both generate most of their revenue from digital advertising. Which one is the best investment opportunity?
In this clip Motley Fool Live recorded on December 16, 2020“The Wrap” host Jason Hall and Fool.com contributor Danny Vena discussed the change in the ad technology landscape and why some players are better positioned than others.
Danny Vena: Well, let me start by saying that I own both shares, and I have owned both shares for some time. So this is nothing new, and I would say that, as these companies are smaller in the grand scheme of things, I think that both can do very well from here, but this will be one of those cases where I will adopt a buying approach best.
I’ll start by saying, I think you must own both businesses. That said, let’s take a closer look at what they do and who they are, and whether one of them is a better investment opportunity. Now, I will say that I have an answer, but I want to show people some of the metrics and some other things related to companies so they can get an idea of where I’m coming from.
The first thing I’m going to do is share my screen here because I find it very interesting. If you look at this chart, the year-to-date price chart for both stocks, one is over 140%, which is Magnite, and Roku is 144%. If you look at both, both at around 140%, you might think, “Hey, look at this”, but let’s look a little further now.
The first thing I want to do is see what the revenue for the past 12 months has done. You can see that in the past 12 months, Roku generated $ 1.5 billion in revenue, while Magnite generated $ 188 million in revenue. We are talking about stocks that are on two completely different playing fields here. Just to further emphasize that, if you look at the market capitalization, Magnite has a market capitalization that is just over $ 2 billion, while Roku has a market capitalization of $ 43 billion. Again, there are two companies of totally different sizes here.
That said, I want to look at the changes in the last 12 months and you will all see that Roku has really increased its revenue. I’m sorry, this is accumulated in the year. We go to the last 12 months. Roku increased its revenue by about 36%, while Magnite increased its revenue by 20%.
Now, it’s important to note that these two companies – it may not look like that – you think of Roku, you think of streaming devices and you think of Magnite, Magnite operates as a digital advertiser, but in fact they overlap quite a bit in the space where act.
Roku earns most of his 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 placements, like[Disney‘s] Hulu, or you can get subscription channels like Netflix and Amazon Prime. They are all there. Now, now, the great resistance is [AT&T‘s] HBO Max, but we are hoping to hear about an agreement between HBO Max and Roku at any time. (Author’s note: this deal has already happened.)
Most of their revenue comes from what they call the platform segment. What the platform segment does is deal with advertising, the Roku channel and also the Roku operating system. Now, Roku has developed its own operating system for connected TVs and was built from scratch, which was very different from what many competitors had done with their streaming devices. What they did was to take a mobile app and adapt it. By rebuilding it from scratch, Roku allowed them to have a much better product, and they license it to an increasing number of connected TV manufacturers.
This is important because now, if you go back to last year, the Roku operating system was found on one in three televisions sold in the United States and one in four of each television sold in Canada. Therefore, they have a massive operational base.
Let’s talk a little bit about what Magnite does. Magnite is actually the leading company, they are the largest programmatic advertising platform and independent seller. Now that’s a lot. Programmatic advertising uses high-speed computers and sophisticated algorithms to combine the available ad slots. Say, for example, on ABC news, they can have a space to advertise on the seven o’clock news, and what they do is help to match the existing ad stock with these slots.
Now, people think a lot about The Trade Desk (NASDAQ: TTD). In fact, the trading desk operates on the other side of the coin. The trading desk operates on the buy side, while Magnite operates on the sale side. The selling side is much more fragmented. The fact that Magnite is much smaller, I think it has many opportunities to grow, but what I don’t think is that we will never see Magnite grow as much as Roku.
Some faster metrics, and then we’ll call them here. If you look at what is the price / sales ratio for Roku, 27 times the current sales. Magnite is only about 8 times current sales. Magnite is much more of a bargain, Roku is more of a high-risk, high-reward opportunity.
After looking at these things, I would say that between the two, I believe that Roku still has a lot to do. I think it has a much bigger market opportunity because, essentially, Roku’s total addressable market will be any television channel, whether it has advertising or not. Therefore, it is a large addressable market. Considering that with Magnite, Magnite is limited to one side of the equation and in a much more fragmented market, so they don’t have a market opportunity as big as Roku. Having said all that, between Roku and Magnite, I would choose Roku.
Jason Hall: I am divided and have a little prejudice here because I am not the owner of Roku and I am the owner of Magnite. I think you could do well anyway. For what you said earlier, I think both are worth having, although I haven’t bitten the bullet yet and bought Roku. But you present a really compelling case.