The market has been especially tough on these two names and so I want to take the opportunity to go back over our conviction and to cover any risks.

You can find my past analysis on these companies here:

As I write this, we haven’t gotten Snap’s earnings which will be followed by other ad-tech companies reporting next week. This will be our first glimpse into the rebound from the economy opening back up. My hunch is that both of these names (MGNI and FUBO) will see a boost from increased ad spend (as well as a few others we hold in the portfolio). There was an excellent post on the forum about the boom in advertising.

Magnite

When we look at the messy ad ecosystem, it's rare to find a management with this level of focus in capturing a specific market. The market that Magnite is focused on is the Connected TV programmatic and omnichannel supply-side market. That's a mouthful, and at first glance, it may sound like every other ad platform out there, but that’s why we look deeply at product to give our readers and the I/O Fund a competitive advantage. Nuances matter.

Magnite is not the shiniest company to analyze if you’re a financial analyst. The former company, Rubicon, struggled after the walled gardens of Facebook and Google were built, which led to total domination of digital advertising.

Prior to this, Rubicon was a well-known name in online programmatic. Still, it's understandable if more traditionally trained financial analysts saw the negative revenue growth between 2016-2017 and wonder how this management can stage a comeback.

Magnite’s CEO was the former CEO of Millennial Media, a company that took an incredibly hard hit when the walled gardens (Facebook, Google) leveraged their first-party data to compete with traditional ad-tech companies.

There are critics of the CEO’s background but we are neutral and don’t extract anything meaningful here as the fate of Millennial Media was out of the CEO’s control. Google and Facebook wiped out many ad-tech companies around 2014.

In early 2020, Rubicon acquired Telaria, and then the combined company, Magnite, faced a tough two-quarters due covid's shelter-in-place. We saw juggernauts like Google report negative revenue growth, which reflects the challenges all ad-tech faced. To complicate matters, Magnite is acquiring SpotX, which requires extra work for a financial analyst to piece together, and there is uncertainty with Apple’s IDFA changes.

My point here is that Magnite requires in-depth product analysis – and we can’t solely rely on the financials. I will touch on financials and future growth, but the main key points are hidden in the product and the unique advertising environment that is Connected TV. The stock has seen extreme volatility, as has Fubo, yet it's important to revisit why we have conviction so that market sentiment doesn’t push us to fold our hand.

What “Independent SSP” Really Means

My webinar on Twilio spelled out why PII and an omnichannel marketing platform could take some budget from data management platforms, which primarily deal with second-party and third-party data. In the presentation, I had discussed how Facebook and Google have the strongest positioning for DMPs because they also mix their own first-party data (anonymously).

First-party data is always owned by the publisher. Facebook and Google are publishers, which is why they have first-party data to mix at the DMP level. Magnite is on the publisher side of the transaction. This was less desirable with display where 10 or sometimes 25 SSPs would compete on an open programmatic marketplace for a $0.20 placement.

However, Connected TV inventory is unique as the inventory is premium and goes for $25 to $40 for placements on a private marketplace. This means that publishers will work with maybe one or two SSPs total as the private marketplace does not result in higher bids because the pricing is already agreed on.

When I talk about ad-tech, I repeatedly say there’s no such thing as a moat. It’s a convoluted space and even Facebook/Google are seeing their moat become challenged by Apple. The only moat is owning the audience. The other pieces are in a state of constant flux.

However, there are advantages that a company can have to gain market share – for Roku, this is the operating system and owning the whole stack. Roku owns the audience and there is an even bigger bonus to owning the stack as Roku has access to data at the device level from thousands of apps on the device and any publishers on its ad platform.

SSPs and DSPs especially come under pressure because they don’t own the audience. However, Magnite is leveraging a few key strengths, such as becoming the primary independent SSP in the Connected TV arena. On the earnings call, the management stated that it would be hard for other SSPs to compete at this point, given the unique private marketplace environment of Connected TV. This is due to Magnite’s acquisition strategy, and we see the effects of this in the Disney partnership, where Magnite is the obvious choice on the supply side.

“And as it relates to the ability for an SSP that has never done in CTV to jump in. I just put myself in their shoe before we bought Telaria, and we were going through that build by partner scenario, and it just dawned on us that the build scenario would cost a lot of money. You'd have to hire a lot of talent, and there's a lot of risk because the market is always moving. And by the time you build your first version, the market might be onto the fourth version.” – Magnite management on why they are likely to be unrivaled as the leading independent SSP” – Magnite management on why they are likely to be unrivaled as the leading independent SSP

Being the leading independent SSP on Connected TV may mean that Magnite will likely outpace all other SSPs; however, they still have Comcast's FreeWheel and Google to compete with. For the next 18 months at least, this is very doable because the company has Disney’s data and publisher segments to work with (more on Disney below).

Being the preferred partner for Disney on CTV inventory is a considerable head start for Magnite, while the company builds out the best software solutions for publishers. With the SpotX acquisition, Magnite now has 250 software engineers aimed at building the best product possible on the supply-side.

Google clearly is not the easiest company to compete with on engineering talent yet small and mid-size publishers are more likely to work with Magnite. Case in point, Magnite and SpotX work with the following list: Discovery, Disney/Hulu, Roku, Samsung, Sling TV, ViacomCBS, Vizio, WarnerMedia, A+E Networks, Crackle Plus, The CW Network, Electronic Arts, Fox Corp., fuboTV, Microsoft, Newsy, Philo TV, Pluto TV, Tubi, Vudu, and Xumo.

As stated, it’s not uncommon for a publisher to work with more than one SSP but the private marketplace greatly reduces the number of relationships a publisher has to the point where it’s inconsequential to work with multiple SSPs.

From the most recent earnings call:

“As I said before, on a previous question, I don't see this becoming an open market world. It will be private marketplace. And when you do private marketplace deals, you tend to do hundreds of deals and you create a deal library, and buyers get used to where this deal library sits. And they're generally not sprinkled around 10 SSP players. They're sprinkled around 1 or 2 because there's just no advantage to it. Because they're not open market, the pricing has already been agreed upon. You're just transacting through pipes. And so keeping the deal libraries with 1 or 2 players is what's occurring today and, I believe, is what you're going to see long term. So I don't see this evolving to 25 SSPs like you would see in the display world.” -Magnite management on why their positioning on CTV should not be compared to the SSP positioning on displayAnd they're generally not sprinkled around 10 SSP players. They're sprinkled around 1 or 2 because there's just no advantage to it. Because they're not open market, the pricing has already been agreed upon. You're just transacting through pipes. And so keeping the deal libraries with 1 or 2 players is what's occurring today and, I believe, is what you're going to see long term. So I don't see this evolving to 25 SSPs like you would see in the display world.” -Magnite management on why their positioning on CTV should not be compared to the SSP positioning on display

Software and Identifiers

Magnite is currently in beta on their proprietary CTV Unified Decisioning solution. This will help programmatic ad rates (CPMs or cost per one-thousand) exceed ad rates sold direct (CPMs). The software solution helps publishers drive higher yields by mixing direct and programmatic in the bidding process. This allows publishers to sell direct and programmatically in a hybrid format. Management indicated this won't be something that can be financially modeled this year as it's still in beta.

Comcast’s FreeWheel launched Unified Decisioning a year ago when the company decided to leverage its audience, create publisher segments and work with 20+ DSPs to cut SSPs out of the media buying process. This is Magnite’s primary competitor and notably Comcast owns the audience.

Regarding identifiers, Magnite packages first-party data as publisher segments and these are more insulated from Apple's mobile ID and tracking changes.

Magnite and Adform measured monetization lift based on first-party identifiers, including environments that currently disallow third party cookies such as Firefox and Safari. Initial results from Q1 2021 showed significant lift, with overall eCPMs increasing more than 30%, compared with ad requests which did not contain first-party identifiers. A similar study also showed click-through rates on Safari impressions doubled, showing an increase in performance for buyers. including environments that currently disallow third party cookies such as Firefox and Safari. Initial results from Q1 2021 showed significant lift, with overall eCPMs increasing more than 30%, compared with ad requests which did not contain first-party identifiers. A similar study also showed click-through rates on Safari impressions doubled, showing an increase in performance for buyers.

SpotX Acquisition – Why It’s Important:

In February, Magnite agreed to buy SpotX for $1.7 billion for combined revenue of $350 million, of which 67% came from CTV and video advertising in the fourth quarter. Meanwhile, the merger results in $35 million in cost savings. Non-video business will comprise 33% of total revenue.

It’s easy to see the synergy with Magnite pursuing more CTV market share. Beyond the obvious OTT ad synergies, the two main strengths of the SpotX acquisition is omnichannel online video (OLV) and also SpotX’s global reach.

By offering CTV and OLV through one SSP, Magnite can gain strategic positioning as most advertisers will want to buy omnichannel inventory across multiple digital video formats. Roku with DataXu is also omnichannel and excels at Connected TV omnichannel advertising due to first-party data. The obvious question here is why not double down on Roku – especially since the company owns the audience? It is because I believe Magnite can move faster globally than Roku.

SpotX is the largest global supply-side platform. Last year, global ad spend on SpotX grew 42% and was driven by OTT, which accounted for 70% of ad spend. Business in EMEA and APAC grew 107% and 66% respectively. SpotX reaches 25 million CTV households in EMEA, or about half of all ad-supported CTV households.

SpotX’s biggest market currently is the United States as it’s also the most mature market. The supply-side platform reaches 70 million CTV households with a 40% increase in household reach since May 2020 and a 67% increase since December 2019.

Disney Partnership:

In March, Disney announced the Disney Real-Time Ad Exchange (DRAX) which follows the launch of Disney Hulu XP (DHXP) in January. This positions Disney as a bidding solution and leverages Disney’s data for audience targeting. Specifically, DRAX is for “programmatic buys and Disney Select for data-driven targeting,” which means Disney inventory will be more attractive due to the company leveraging its audience graph.

As investors, we have to look at both scenarios – best case and worst case. The best-case scenario is that Disney renews the partnership with Magnite after 18 months. The worst-case scenario is that Disney removes the need for a SSP and handles the auction themselves like Comcast Freewheel.

Right now, Magnite is a preferred partner on Disney inventory but not ESPN.

Disney, obviously, being a far-reaching media empire with many, many, many media formats, the exclusivity or the preferred partner lies around the cross-platform inventory. So if you were to buy inventory from the DXHP that Disney cross-platform sale, all of that goes through Magnite. all of that goes through Magnite.

And specifically, if you were to buy Hulu only and didn't buy any of the cross-platform inventory, that too would go through Magnite. You're capable of buying ESPN without going through Magnite, but conversely, Magnite is very capable of selling ESPN inventory, as well. So, we have access to all of it. Some of it's in a preferred partnership, others is in an open market partnership.

The case for Disney staying with Magnite on SSP:

Comcast FreeWheel will need to attract more publishers in order to scale. If Disney becomes a SSP, then they are limited to only their inventory (Hulu, ESPN, etc) or they must attract publishers to its ad platform. It would be better if Disney sold its segments on its inventory first and then across hundreds of thousands of applications second.

Secondly, Disney will need to do omnichannel, which is desirable as advertisers can reach customers across multiple digital formats and measure campaigns.I don’t see Disney launching (or acquiring) an omnichannel ad platform on the supply side to compete with Magnite but I could be wrong. (I must admit, I do wonder if Disney would acquire Magnite someday though).

If we look at the path that Facebook and Google took, it was not only to transact on their own inventory but they eventually took the place of the SSP and signed on many publishers to build a walled garden across mobile applications. These tech giants knocked out demand side platforms, as well, because the advertisers could go direct. Therefore, it’s not clear which side Disney would go after if they entered the ad-tech market. You could argue they’ll do what Comcast did or maybe they’ll encourage media buyers to go directly to Disney with Magnite’s omnichannel programmatic offering on the backend. Right now, Magnite is building a custom marketplace for Omnicom, for example.

The case for Disney not staying with Magnite as SSP:

I think it’s very (very) unlikely that Disney would work with another independent SSP on CTV ad inventory. As stated above, Magnite really is the best choice when it comes to an independent SSP and Disney’s nod with a preferred partnership supports this.

However, the other option is that Disney becomes the SSP like Comcast’s Freewheel. There is a 50/50 chance this happens after the 18 months is up. Nobody can tell you what will happen here.

As an investor in Magnite, I prefer to see what Magnite can do with Disney’s data and preferred partnership plus the recent SpotX acquisition before jumping to conclusions around the impact this might have. Meaning, Magnite should report solid earnings over the next 1.5 years and it’ll be hard for the market to ignore this. My hope is that the global footprint is large enough by then to where Magnite will be prepared for growth without Disney’s partnership (should the worst-case scenario play out).

Financials Snapshot

In Q4, Magnite grew revenue 69% YoY, or 20% on pro forma basis, to $82 million. CTV revenue was $15.3 million, representing an increase of 53% YoY on a pro forma basis. Online Video (OLV) revenue grew 35% YoY on a pro forma basis.

In total, Magnite recorded 34% of revenue from its CTV segment, 33% of revenue from its OLV segment, and 33% from its display, audio, & other segment.

When combining Magnite with SpotX for revenue of $350 million, 67% came from CTV and video advertising in the fourth quarter.

GAAP based gross margin for Q4 was 74%, up from 66% in Q3. Net income was $5.9 million in Q4 versus net income of $1.5 million in the fourth quarter of 2019. Adjusted EBITDA was positive $30 million while free cash flow totaled $20.7 million, representing an impressive 25% free cash flow margin.

Magnite guided for $60 million of revenue at the midpoint of its Q1 outlook, representing 65% YoY growth. In the company’s Q4 earnings call, Magnite management talked about their expectations for a strong year-over-year growth rate led by CTV. Management also raised its long-term adjusted EBITDA targets to 30%-35%, based off the successful acquisition of SpotX to reflect the higher margins from SpotX.

Below is a comparison of three ad-tech stocks: MGNI, TTD, and ROKU:

Magnite management has set a long-term target of 20% top line revenue growth annually. The company expects the acquisition of SpotX to accelerate both growth rates and margins. In total, analysts are projecting 30% YoY revenue growth for Magnite in 2021 and 21% YoY revenue growth for Magnite in 2022. We don’t make earnings calls but we think the company is more than capable of meeting this guidance.

We are on the cusp of earnings from Snap and it will be interesting to see what management teams are saying in regards to the economy opening up. There are industries that spend a significant amount on ads that are finally able to reach paying customers – such as travel, auto, entertainment and sports.

When you compare Magnite’s growth during this challenging time to other ad-tech companies, it has done an excellent job despite travel, sports, etc not participating in its revenue growth.

FuboTV

FuboTV is not for the faint of heart. Regardless of the price weakness, which is probably more broad market driven, we remain long as we see a nice set-up for a company centered in the important trend of live sports OTT and a near-term catalyst with sports betting.

We outline the main risk we see below fundamentally in the Conclusion (yes, that’s my way of saying you should read the whole thing).

I’ve said since early January that the short sellers have one solid argument which is the negative gross margins. The issue is they are hammering on the lagging financials (and scaring retailers) and are not modeling the sports betting opportunity. In fact, the short argument has only gotten weaker since the reports were released in December, which asserted FuboTV’s traffic had fallen off a cliff and the sports betting book was an impossibility.

As you can see in the chart below, not only did Fubo’s traffic not fall off a cliff but the company’s growth stands out compared to other top growth stocks when you look at both Q4 and forward estimates.

The sports betting book launch is the easiest part of the equation, so I did not waver on this point before there were any announcements. Now, we have both free-to-play and the betting app coming out this year. The hard part to tech and all media is amassing an audience. It doesn't matter if you're as big as Facebook or as small as FuboTV – your company's value is determined by the size of the audience and the growth of that audience year-over-year. Products and features can be built and launched fairly quickly if you have the audience. You can pivot, expand, etc – again, as long as you have the audience.

That doesn’t mean FuboTV doesn’t have hurdles to clear – my point is that as investors we should have a mental checklist of what is most important for the stocks we own. The first for a media company is always audience.

As FuboTV investors, it's in our favor that the world's two biggest global sporting events coincide this year – the Olympics and the World Cup. What's even more interesting is the economy is re-opening this year and we may see record advertising levels during a time when FuboTV is reaching important live sports audiences.

I’m not going to say it’s a slam dunk (i.e. there are no guarantees) but FuboTV’s path to beating guidance and improving their financials is easier than it appears right now. It probably has the most tailwinds of any company we own in that regard. I say this because the Olympics and World Cup content will demand sizable ad revenue.

North American football rights are in a tug-of-war with even Amazon Prime now in the mix. Hulu announced a carriage deal with the NFL Network and NFL RedZone for Hulu’s Live TV service. The reason why I’m not too worried is that the live sports audience is massive – in fact, these moves may signal a time when cable TV no longer exists and that’s the ultimate goal for a $5 billion market cap company like FuboTV, which will see tremendous windfall if this occurs.

Roku makes this argument frequently when analysts are concerned about competitors, such as Peacock. The argument Roku management makes is that any eyeballs that cut the cord is a windfall for them. If the media conglomerates help push the remaining 74 million cable subscribers in the United States to cut the cord, this helps Roku because the stats show that about 35% to 40% of those 75 million will choose Roku.

We aren’t sure what FuboTV’s true share of the live sports OTT market is because I’ve repeatedly said live sports OTT is too early to draw definitive conclusions. Remember when I said connected TV ads was the future for Roku in 2018 and here we are three years later? I'd say that's similar to where we are with live sports OTT. Another analogy would be subscription video on-demand in its early days (maybe circa 2006). I'm not saying FuboTV’s path to monetization will look like those two companies – I’m trying to give you an understanding of how early we are to the live sports OTT microtrend. We are very early.

FuboTV is not the next Netflix or the next Roku although time will tell if the story is as misunderstood as those two stories were. I believe FuboTV could have similar staying power because of the monetization method — which to be crystal clear — is betting and gamification. Before I expand on monetization, I want to reiterate that live sports is the holy grail for cable subscribers and the microtrend we are invested in – but this is different from a monetization method. Live sports were the last to convert because sports fans are, well, fanatical. In this case, OTT saved the best and highest-paying customers for last.

I don’t have access to Board meetings, obviously, but we can follow the money to see that Disney and Comcast don’t see FuboTV as a competitor. They are backers, and in my opinion, they want a piece of the gamification of live sports. This means free-to-play, betting, and AR/VR. Fubo’s oddball merger with Facebank can lead to AR/VR integration – for instance, a virtual reality boxing match starring Floyd Mayweather. The possibilities here are endless and it doesn’t take much imagination to consider a sports audience to be the perfect AR/VR enthusiasts.

Despite short sellers not seeing how or why a sports betting app could merge with live sports content, we now see DraftKings partnering with Sling/DISH. I guess content and sports betting does go together, after all (insert sarcasm). It’s surprising that the short reports written by telco and media analysts said it cannot be done despite Sky Media having the most successful sports betting model globally.

From purely a user acquisition standpoint, in-app ads with your own content is nearly frictionless and you have a mountain of data to effectively target. FuboTV with Comcast and Disney as backers is much more interesting to me as an investment – and I also believe the NFL Network carriage deal with Hulu will affect DISH more than FuboTV.

Regarding Fubo’s monetization potential, David Gandler has made it clear in this excellent article that 22% of their customers plan to spend more than $100 a month on betting. The number will likely be higher once the product has actually launched. There is also an enviable customer acquisition cost (CAC) and lifetime value (LTV) user acquisition loop between the content and betting. For instance, Fubo can give free sports content away and offer other rewards that are not possible unless you own the audience.

Financials Overview:

In Q4, Fubo grew revenue 98% YoY to $105 million. Subscription revenue was up 91% YoY to $91.4 million, and advertising revenue was up 157% YoY to $13.1 million. Paid subscribers at the end of Q4 totaled 547,880, an increase of 73% YoY.

For the first quarter of 2021, Fubo guided for $102 million in revenue at the midpoint, representing growth of 100% YoY. In the Q4 earnings call, management talked about their expectations for a softer Q1 sequentially, which is in line with historical seasonality trends.

Fubo management discussed their plans to continue to focus on expanding the business through growing its top line. Although the key focus is on top line revenue growth, Fubo still expects to make progress in its path to profitability and margin improvement:

“In terms of the adjusted contribution margin, we don’t provide guidance at this point about these metrics, but we are clearly very focused on expanding our business focusing on growth with an eye to ensure that we continue to improve in our path to profitability delivering an year-over-year improvement of our margins.” – Fubo CFO Simone Nardi

Fubo defines adjusted contribution margin as a “figure to measure the variable costs against subscriber revenue. ACM is calculated by subtracting ACPU from ARPU.”

In the full year 2020, Fubo recorded a 10.1% positive adjusted contribution margin, up from -3.1% in 2019. In turn, gross margins improved from -16% to positive 4.6% in Fubo’s most recent quarter. Fubo did not give Q1 or 2021 guidance for contribution margin or gross margins but management confirmed that they are expecting continuous year-over-year improvement in margins. This is a positive sign for a company whose main focus continues to be growing revenue and expanding the business.

Fubo guided to end Q1 with subscribers of 520,000 to 530,000, representing growth of 82% YoY at the midpoint. Data from Apptopia shows that Fubo ended March with approximately 585,000 daily active users (DAU) versus the Q1 guide for 525,000 paid subscribers at the end of Q1.

Download data from Apptopia also revealed what appeared to be a strong Q1 in terms of app downloads.

Further, we are seeing a strong start to Q2 for Fubo as app downloads are currently tracking above 100% YoY in April.

For the full year, Fubo management guided to end 2021 with subscribers of 762,000 to 770,000, an increase of 40% YoY at the midpoint of the range. Fubo also raised its revenue outlook by 9% above the previous guide in its Q4 earnings call. In total, Fubo is expecting revenue of $465 million for the full year, representing growth of 75% YoY.

Downloads give us a one-dimensional viewpoint yet it’s important to compare downloads with sessions. When broken down week by week, we see sessions up a minimum of 100% at the low point end of March and ticking up towards 200% for about 150 million sessions by mid-April.

Here’s another glimpse of the quarterly data on FuboTV’s total sessions.

You’ll have to decide for yourself after looking at Fubo’s numbers in Q1 if you think the company can exceed this guidance.

Please note, that while Apptopia provides app data, we do not make earnings calls with this data. It is purely for informational purposes and you must draw your own conclusions based on the data provided.

We've laid out our thoughts on the Olympics, World Cup and sports betting app. These points aren't lagging, they are forward-looking, and that style isn't for every investor. It's certainly our style, however, and we are comfortable with our position in FuboTV.

Conclusion:

The risk I see will be in Q2 numbers. This should be the weakest quarter for FuboTV and this may be what’s being priced in right now. We are tracking decent growth here right now so let’s see what management says in the earnings call.

Magnite and FuboTV: Premium Analysis Update