What Bulls Chasing Magnite (MGNI) Are Missing: 25%-50% Downside Risk

Summary

• With shares +400% since Sept 2020, investors are overly bullish on Magnite, formed as a merger between Rubicon Project and Telaria, two companies we believe have troubled pasts+growth strains.
• The market miscalculates MGNI's proforma growth, and gives too much credit for CTV. We estimate proforma sales are -1% YTD, and absent an election boost, CTV Q3 sales -16% yoy.
• Many clues of strain appearing: pro forma cash flow -143% YTD, a new bank financial covenant referencing "max cash burn" and weaker language talking about Q4 CTV performance.
• Serious concerns with management and financial reporting. We believe MGNI operates two independent businesses, yet reports one segment. New Chief Accounting Officer hasn't had an accounting role in 7yrs.
• MGNI is being promoted by a Needham Analyst with a dark past for promoting the failed AOL/Time Warner merger, and allegedly not expressing her true opinions. AOL/Time Warner had a massive accounting fraud charge by the SEC. Needham suggests MGNI is the next Trade Desk (TTD). Our fields checks suggest the opposite. MGNI trades 20% over sell-side analyst fair value and at premium.

Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued an 54-page report entitled "A Repellant Investment,” that outlines why shares of Magnite, Inc. (Nasdaq: MGNI) ("Magnite" or the "Company") face up to 25%-50% downside risk ($14.75 - $20.00/sh). The full report can be downloaded and viewed at www.sprucepointcap.com -  We suggest following us on Twitter @sprucepointcap for exclusive updates and reviewing our disclaimer at the bottom of this post.

Magnite, Inc (Nasdaq: MGNI) was formed in early 2020 by a merger of two advertising technology companies - Telaria (formerly Tremor Video) and Rubicon Project (Rubicon). 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%. We believe investors also misunderstand Magnite's CTV offering and recent performance. Absent a recent election boost, we estimate underlying Q3 CTV revenues declined -16% YoY and that recent 2021 channel checks indicate CTV inventory has tightened, leading to reduced revenues. A subtle change in Magnite’s financial covenant from “Adjusted EBITDA” to “Maximum Cash Burn” and changes in management tone and SEC language around revenue suggests further pressures could lie ahead. Adding to concerns, we believe Rubicon’s CEO Michael Barret failed to promptly disclose an informal SEC inquiry at Millennial Media (NYSE: MM) where he was CEO, while Magnite’s CFO was formerly CFO of Spot Runner, accused in a lawsuit of running a pump and dump scheme, though he was not named specifically. Magnite is being promoted by an analyst with a FINRA citation and checkered past that includes promoting 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.

What does Magnite do?

The Company provides a technology solution to automate the purchase and sale of digital advertising inventory for buyers and sellers. Known as a Sell-Side Platform (SSP), Magnite's platform features applications and services for sellers of digital advertising inventory, or publishers, that own or operate websites, applications, CTV channels, and other digital media properties, to manage and monetize their inventory; applications and services for buyers, including advertisers, agencies, agency trading desks, and demand side platforms, to buy digital advertising inventory; and a transparent, independent marketplace that brings buyers and sellers together and facilitates intelligent decision making and automated transaction execution at scale. Magnite is different from a Demand-Side Platform such as The Trade Desk (TTD) and ROKU's (ROKU) OneView. These platforms exist as an alternative against the "Four Walled Garden" in advertising technology of Facebook (FB), Google (GOOG/ GOOGL), Amazon (AMZN) and Apple (AAPL). Clients of Magnite include Hulu / Disney (DIS), SlingTV, FUBO (FUBO) , FOX (FOXA), and Discovery (DISCA), among others. We believe customer concentration is a big issue for Magnite, one which we explore in our report. Magnite competes with other SSP's such as PubMatic (PUBM), SpotX, Xandr, OpenX, SpotX, FreeWheel (owned by CMCSA)  and Oath (owned by VZ). 

Dubious Management and Board Concern

Spruce Point finds evidence that Rubicon management exaggerated growth opportunities such as Supply Path Optimization (SPO), Demand Manager and Video. Telaria was also also failing to deliver on expectations prior to the merger. We believe Magnite CEO Barrett destroyed tremendous value at his prior CEO role at Millennial Media (NYSE: MM), and for months failed to promptly report an informal SEC inquiry into goodwill accounting. CFO Day held the CFO role at Spot Runner during a period WPP sued it in court and alleged it to be a pump and dump scheme. Telaria’s per-merger former CFO Rego blindsided investors with a material weakness of controls and financial restatement earlier at Vonage Holdings (VG).  Lead Independent Director Robert Frankenberg was present at AOL as an audit committee member during a period the SEC made it pay fines to settle financial reporting violations. Furthermore, he was a Director at Daw Technologies (Nasdaq: DAWK), which had an accounting scandal, restatement and delisting. Mr. Frankenberg has stopped disclosing his association with Daw Technologies since 2014 

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. Based on our research, we disagree. 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 estimated 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 2021E sales, closer to peer multiples, Magnite would have 25%-50% downside risk ($14.75 - $20.00/sh)

Thank you very much for your continued interest in our investment research. We recommend downloading the full report before making any investment decision and reading our disclaimer.

Disclaimer

This research presentation expresses our research opinions. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (“SPCM”) (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and calls on the stock) covered herein, including without limitation Magnite, Inc (“MGNI”), and therefore stand to realize significant gains in the event that the price of its stock declines. SPCM has a long position in PubMatic, Inc. (PUBM), Trade Desk (TTD) and Roku (ROKU) and stands to benefit if its share increase. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. All expressions of opinion are subject to change without notice, and Spruce Point Capital Management does not undertake to update this report or any information contained herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities.

This research presentation expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence, with assistance from professional financial, legal and tax experts, before making any investment decision with respect to securities covered herein. All figures assumed to be in US Dollars, unless specified otherwise.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of MGNI or other insiders of MGNI that has not been publicly disclosed by MGNI. Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is registered with the SEC as an investment advisor. Spruce Point Capital Management LLC is not registered as a broker/dealer or accounting firm.

This research presentation expresses our research opinions. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (“SPCM”) (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and calls on the stock) covered herein, including without limitation Magnite, Inc (“MGNI”), and therefore stand to realize significant gains in the event that the price of its stock declines. SPCM has a long position in PubMatic, Inc. (PUBM), The Trade Desk (TTD), and ROKU (ROKU) and stands to benefit if its share increase. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. All expressions of opinion are subject to change without notice, and Spruce Point Capital Management does not undertake to update this report or any information contained herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities.

This research presentation expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence, with assistance from professional financial, legal and tax experts, before making any investment decision with respect to securities covered herein. All figures assumed to be in US Dollars, unless specified otherwise.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of MGNI or other insiders of MGNI that has not been publicly disclosed by MGNI. Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is registered with the SEC as an investment advisor. Spruce Point Capital Management LLC is not registered as a broker/dealer or accounting firm.