1 under-the-radar growth stock to buy in November
F.Finding stocks that are rapidly growing but still undervalued is not an easy task. When you find one, it can be a great company to add to your portfolio.
So what would you do if I told you there was one stock that was down 65% from its 52-week high in February, but that was also currently posting revenue growth of 116% year over year in the third quarter and has a value of only 8.9 times sales?
Describe these metrics Magnite (NASDAQ: MGNI), an online advertising technology company that is growing massively yet relatively cheap, especially when compared to many of today’s soaring growth stocks.
Let’s talk about why this under-the-radar stock could be a great buy in November.
Image source: Getty Images.
Leader in a fast growing industry
Magnite competes on the seller side of the ad technology (adtech) industry, which means it represents publishers who want to sell ad space. Magnite works with buy-side advertisers or adtech companies – companies that represent advertisers – to sell its publishers’ ad space to the highest bidder. Magnite’s priority is the publisher – making sure they make the most money on their ad space – but the company also helps advertisers find the most effective way to reach their target audience.
Magnite is a leader among sell-side adtech companies, but its market cap is only $ 3.6 billion – which shows how under-penetrated the adtech space is. Global digital advertising spending is expected to grow from $ 325 billion in 2019 to $ 526 billion by 2024, an average annual growth rate of 10%. That suggests there is a lot of growth going on for the industry as a whole – with Magnite possibly the biggest beneficiary.
The company became the market leader in April 2020 through a merger of equals – The Rubicon Project and Telaria. The company then acquired other companies, including SpotX and SpringServe, to drive growth in connected TV (CTV). .
Because of its size and leadership, Magnite has drawn impressive clients, including Disney, Roku, and the NBA. Magnite focuses on CTV – advertising on streaming services to increase revenue per user while controlling the user experience for publishers – and the company sees this as its most important growth opportunity for the future.
Prove your worth
So far, the company’s growth strategy has paid off. Magnite announced third quarter results on November 3, reporting revenue growth of 116% to $ 132 million. CTV’s revenue reached $ 43 million, up 290% – or 51% excluding SpotX or SpringServe earnings. The Company’s acquisition of SpringServe was completed on July 1.
The company’s net loss increased significantly – faster than sales. The net loss for the third quarter of 2021 was $ 24.3 million, an increase of 131% from the net loss of $ 10.5 million for the third quarter of 2020. This resulted in the company’s net loss margin increasing from 17% of sales to 18.4% of sales.
While that loss is small, it should be moving in the opposite direction for an industry leader. This was due to sales and marketing expenses, which more than doubled year-over-year from $ 22 million to $ 52 million.
The company has been consistently near profitability for the past two quarters, bringing the company’s total net loss this year to $ 0.4 million. His free cash flow that year was $ 34 million, which more than made up for his net loss for the year. For a company that 100% plus sales growth, strong free cash flow generation and profits close to breakeven, a valuation of 8.9 times sales is very attractive.
What could go wrong
The main problem investors have with Magnite is that much of the growth comes from acquisitions rather than organic growth. This was evident in the third quarter when the company only increased its CTV sales by 50%, excluding its acquisitions. If you are not concerned about growth through acquisitions, you can brush this under the rug, but there are many investors (myself included) who pause when they see a company that is growing primarily through acquisitions.
The other major risk is that Magnite could be affected by privacy changes made to operating systems by alphabet‘s google and Apple. Both companies have announced that they will limit access to cookies. Cookies are an important source of data for advertisers advertising online and on mobile phones, so removing cookies would make Magnite’s mobile and web ads less effective and less valuable.
However, CTV advertising is not exposed to this risk. Given where Magnite’s focus is, this risk is less important than it is for other adtech companies like The trading desk.
The bottom line is that Magnite’s growth as a market leader is incredible, and when you consider how high the ad spend could get, the future growth potential is enormous. Buying a market leader which is growing fast at just 8.9x is a steal which is why I think Magnite might be a top stock to buy this month.
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Suzanne Frey, an executive at Alphabet, serves on the Board of Directors of The Motley Fool. Jamie Louko owns shares in Apple, Roku, The Trade Desk, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Magnite, Inc, Roku, The Trade Desk, and Walt Disney. The Motley Fool recommends the following options: long calls in March 2023 at $ 120 to Apple and short calls in March 2023 at $ 130 to Apple. The Motley Fool has one Confidentiality Policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.