Why Magnite Stock Jumped 40% Last Month

Shares of advertising-technology (adtech) company Magnite (MGNI 5.19%) were up 39.8% in May, according to data provided by S&P Global Market Intelligence. The company kicked off the good times by reporting financial results for the first quarter of 2024 on May 8. Then on May 15, it was revealed that it had partnered with tech titan Netflix.

For context, Magnite was once a stock market darling because investors had high expectations for growth. But in recent years, shares have slumped as growth failed to materialize.

In Q1, however, Magnite turned some heads by generating revenue of $149 million, which was up 15% year over year and which soared past expectations of $124 million. Moreover, management says it expects adjusted revenue (it adjusts for pass-through costs) to grow 10% for the year, which is also better than expected.

A partnership with Netflix — announced after Q1 results — could potentially help Magnite beat its guidance. According to Netflix, 40 million people are now on its ad-supported streaming tier, up from just 23 million in January. During May, Netflix said that Magnite will be helping it build its in-house ad capabilities as it grows that part of the business.

In the streaming world, it doesn’t get much bigger than Netflix. And this is why investors were excited about Magnite.

The consolidation trend is a friend

When companies such as Netflix want to offer ads on their content, there are plenty of agencies looking to buy those slots. The ones trying to buy ad slots are called demand-side platforms (DSPs). But since these transactions take place digitally in a split second, Netflix and its peers need software to sell those spots, and that’s what Magnite does.

To be clear, Magnite doesn’t only power Netflix. On May 22, Magnite announced that it was working with Shopsense AI. Shopsense AI may be obscure to most investors. But it’s powering some capabilities for Paramount, which is another big name in streaming.

There are many small companies that do what Magnite does. But Magnite CEO Michael Barrett recently said, “There is a clear trend to consolidation in our space.” Other players note this as well. Consolidation seems to favor the biggest adtech players, which in this case is good for Magnite as evidenced by winning Netflix and Paramount in a single month.

Will the profits start rolling in?

It seems that the trends for top-line growth are in Magnite’s favor, and that’s good for investors. Now we will see what the company can do on the bottom line, which is also quite important.

From a cash-flow perspective, Magnite is doing quite well, and cash flow is set to increase. But stock-based compensation has largely kept it from profits according to standard accounting principles. On one hand, it’s made several acquisitions, so this is to be expected. But with many of those well in the rearview mirror now, hopefully Magnite will show investors something better on the bottom line in the near future.

Jon Quast has positions in Magnite. The Motley Fool has positions in and recommends Magnite and Netflix. The Motley Fool has a disclosure policy.