The world continues to change, and uncertainty and fear are currently high. These two broad factors have combined to create a very specific attractive opportunity to generate high upfront income and very large price appreciation potential. This small digital advertising company ($1 billion market cap) is in the right place at the right time (the intersection of disruption and volatility) thereby creating this very attractive option trade opportunity (plus, the $9 share price makes the “cash secured” part of this trade more palatable for some). In our view, this is an attractive trade to place today, tomorrow and potentially into early week (so long as the share price doesn’t move too dramatically before then). You get to keep the attractive upfront premium income this trade generates (no matter what), and you may end up owning shares of an extremely attractive, long-term, small cap, disruptive-growth stock at a very compelling low price.
Magnite (MGNI)
Magnite is a digital advertising company in the right place at the right time (digital advertising is disrupting the traditional advertising industry as the ongoing global digital revolution is massive and just getting started) and Magnite has a lot of room to run. Specifically, it is the world’s largest sell-side platform that facilitates buying and selling of advertisement inventory available across several ad channels such as mobile or desktop websites, applications, or Connected TV. We highlighted Magnite’s attractiveness back on September 14th in this very detailed report, and since that time the share price has risen from ~$5.67 to over $9.50.
Magnite Share Price:
However, the shares are volatile (as you can see in the chart above), and this is helping to create this very attractive trade opportunity.
The Trade:
Sell Put Options on MGNI with a strike price of $7.50 (~21.3% out of the money, it currently trades at ~$9.53), and an expiration date of November 20, 2020, and for a premium of at least $0.15 (this comes out to approximately +24% of extra income on an annualized basis ($0.15/$7.50 x 12 months, annualized)). This trade not only generates attractive upfront premium income for us now, but if gives us a chance at buying shares of this attractive long-term company at a dramatically lower price ($7.50—the strike price) if the market price falls below $7.50 and the shares get put to us before this option contract expires in 29 days. And we get to keep the upfront premium income no matter what.
Your Opportunity:
We believe this is an attractive trade to place today, tomorrow and potentially into early next week, as long as the price of MGNI doesn't move too dramatically before then and you’re able to generate enough premium income to your liking. Depending on how you input your trade, you may be able to get filled at $0.20 or even $0.25, but that depends on how the market is moving when you place the trade.
Our Thesis:
Our overall thesis is simply that we consider MGNI to be an attractive long-term investment opportunity—albeit a volatile one (this is a compelling, small cap, ~$9.50, growth stock). The shares have rallied hard since our previous report highlighting Magnite’s attractiveness back on September 14th (in this report), but because the market remains volatile (especially for small cap growth stocks), we may get a change to pick up more shares at a lower price (i.e. that’s why we like this options trade).
Since our previous full report, Wall Street has continued to highlight the attractiveness of this stock, such as this note from Needham:
Needham highlights value drivers implying 70% upside for this ad industry player
The advertising industry slump driven by the COVID-19 pandemic has created catalysts for change in the ad industry, including heavier consumer adoption and viewing of digital video on connected televisions, and the canceling of TV upfronts moving part of those dollar commitments into the scatter market.
And Needham's latest update on Magnite (NASDAQ:MGNI) highlights "three hidden upside value drivers" pointing to 70% upside in the stock (or more, if the bull case pans out and the industry develops a better targeting ID).
Nearly all connected TV ad inventory is sold in private markets rather than open auctions, analyst Laura Martin notes, which makes for a moat for Magnite. The company likely makes more money per ad unit selling CTV than other video ads, based on higher CPMs and a higher take rate for Magnite.
Meanwhile, when it comes to the industry-wide threats to identifiers like IDFA and cookies, the bulk of Magnite's video and mobile ad revenue doesn't have either, implying downside exposure of less than 30% of revenues. Cookies are likely to hold up for a while, and in the meantime, Magnite and peers are launching alternatives that aren't tied to Google, she says.
The company raised guidance for Q3 revenues by $10M, to $53M - "ill-advised and unnecessary unless management was sure to reach this higher revenue," which the combination of Telaria/Rubicon could accomplish together but not as standalones, she writes.
And it's a pure play on a digital ad recovery, set to strengthen along with ad spending. "We believe COVID-19 plus the new California privacy rules should shake out MGNI's lower-quality competitors."
She writes that Magnite trades at a steep discount, both to global aggregators with 100% ad-driven models - this includes Facebook (NASDAQ:FB), Google (GOOG, GOOGL), The Trade Desk (NASDAQ:TTD) and Snap (NYSE:SNAP) - and to streaming/over-the-top comparatives, including Netflix (NASDAQ:NFLX), Roku (NASDAQ:ROKU) and World Wrestling Entertainment (NYSE:WWE).
That's a gap or gaps that will eventually close, she says. The firm has a $10 price target, implying 70% upside.
Also, for your reference, here is a look at the latest Magnite ratings and target prices by Wall Street analysts according to Factset (i.e. 100% of the 7 analysts covering it rate it a buy):
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. Magnite doesn’t pay a dividend, so that is a non-issue. However, Magnite is expected to announce earnings after the market close on November 9th, and this will add volatility to the share price. However, given the attractive upfront premium income and long-term attractiveness of the business—we’re comfortable taking on this earnings announcement risk/volatility. In fact, it is because of this short-term uncertainty that the upfront premium income on the trade is higher/more attractive.
Also worth mentioning, digital advertising has been on a very short-term slowdown as advertisers have waited for more clarity surrounding the Covid-19 pandemic. But now with some additional clarity in the latest quarter, we expect strong revenue and strong forward guidance from the company in the quarters ahead, as advertising ramps back up—especially digital advertising as the global digital revolution marches on at an accelerated pace—to the benefit of Magnite.
Conclusion:
We like Magnite’s business over the long-term thanks to its compelling business model, and we believe the shares have enormous long-term upside potential (albeit with plenty of short-term volatility). But this is an example of a time where we’re willing to take on a little short-term volatility risk (with a small allocation to Magnite in our portfolio) in exchange for its very large long-term price appreciation potential.
If shares of Magnite get put to us within the next month at the much lower price of $7.50—we’re happy. And if they don’t get put to us, we’re still happy to keep the attractive upfront premium income this trade generates for us (we get to keep the income no matter what).