- The Trade Desk is a compelling ad tech platform with an ambition to capture the 40% of the digital ad market not flowing to Facebook or Alphabet.
- Customer value proposition is compelling, and agency budget decisions toward the Trade Desk platform speak for themselves.
- Financial discipline of the company is excellent, with compelling revenue growth, profitability and returns on invested capital.
- While there may be near-term turbulence from a macro-economic perspective, TTD is well positioned with a number of favorable secular trends.
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The Trade Desk (NASDAQ:TTD) provides a digital advertising management platform for advertising buyers to manage advertising campaigns and to coordinate the demand and supply of inventory. TTD is changing the way that digital advertising is bought and sold and enables precision targeting of campaigns across video, mobile, social, audio and connected television formats.
The Trade Desk allows the most granular targeting of advertising content by aggregating long tail digital inventory. TTD has a market capitalization of almost $17B, and generated close to $660M in annual revenue in 2019. TTD has delivered investor returns of 93% p.a. over the last 3 years.
Highly capable founder with incredible vision
Every once in a while, you have the opportunity to participate in an exceptionally disruptive opportunity that changes the status quo. In the world of digital advertising, that opportunity may well be an investment in the Trade Desk. However, key to be able to realize this opportunity is not only the vision of the founder and the foresight that they have for what the industry should look like, but a track record of successful execution and the ability to guide and steer in uncharted waters, and it's here that the Trade Desk is fortunate in having Jeff Green.
Green has both the vision of what the digital advertising experience should look like, as well as being a founder with a track record of success and experience in the space, having sold AdECN, one of the first demand side ad exchanges to Microsoft (MSFT) back in 2007. Importantly, for Trade Desk, Green combines a track record of vision and execution. Green's vision for digital advertising is to remove the waste and inefficiency in the digital advertising model by enabling ad agencies to quickly and cost effectively reach their targets.
An Innovative Model That Delivers Transparency And Results
Advertisers are increasingly seeking data to drive decisions around where they place digital advertising, rather than looking to buy broad audience cohorts and sampling segments, which they traditionally did. The Trade Desk's format of programmatic advertising relies on sophisticated algorithms which correlate available inventory with the targeted cohorts and real time pricing information of such inventory to deliver desired campaign results while maximizing ROI for advertisers.
Source: The Trade Desk Q4 2019 Investor Deck
The process is transparent and provides high visibility around results. This is an approach that is resonating with agencies and brands. Programmatic advertising now dominates overall digital spending but is still expected to grow rapidly as a result of digital's continued growth in advertising share.
In The Driver's Seat To Be A Beneficiary From New Ad Formats
Another secular tailwind that The Trade Desk has been riding is that of the shift from linear TV consumption to that of on-demand programming, delivered via connected TV. Audiences are increasingly accessing content via connected TV platforms like Apple TV (AAPL), Sling, Roku (ROKU), while consumption of prime time shows via linear TV platforms has been steadily on the decline.
TTD has been actively pulling in connected TV inventory into its ad serving platforms. Lack of access to this inventory represents a blind spot for advertisers, with connected TV ad impressions, making up almost 49% of total digital ad impressions in 2019. The efforts that the Trade Desk have been making in this area have been paying dividends, with Connected TV advertising spend on the platform more than doubling year over year.
A similar phenomenon has also been taking place with on the audio streaming side, with audio streaming consumption increasing at the expense of traditional audio formats. The emergence of platforms such as Pandora (OTCPK:PNDZY) and Spotify (SPOT) has helped create digital audio inventory, which Trade Desk has similarly been a beneficiary. This is also a segment that is driving significant growth for Trade Desk and has grown almost 200% year over year.
Overall, the shift to connected TV, connected audio and programmatic advertising constitute massive markets for the business.
Trade Desk Q4 2019 Investor Deck
Platform Neutrality Free of conflict
While there is little dispute of the significant ROI that the digital advertising market share leaders, Facebook (FB) and Google (GOOG) (GOOGL) provide with a closed platform, it is not easy for advertisers to understand what inventory and what types of cohorts their campaigns were run on, what contributed meaningful return and what didn't. This limits data, insights and intelligence for future targeting because they are essentially deal with a 'black box'. With TTD's open platform, advertisers and ad buyers can see exactly where their inventory was placed and what type of returns have been achieved.
TTD also offers an element of neutrality for advertisers. Given that it doesn't own any of its own inventory, brands don't suffer from being given suboptimal placement in 'owned properties' to satisfy Google or Facebook's corporate revenue objectives when it may not be the best choice for a given campaign.
Well placed to be a beneficiary from any 'Big Tech Fallout'
In spite of the fact that Google and Facebook provide compelling returns for advertisers, there has been a groundswell movement against the power that the giants have. With close to 60% of the digital advertising market accruing to Google and Facebook, there have been calls for the advertising business of Google to be separated from the rest of the business, something which would materially impact the effectiveness of the 'closed loop'. Trade Desk stands to be a material beneficiary from any regulatory changes which impact the effectiveness of the big tech ad platforms and the ROI they can deliver.
The Trade Desk entered into ad placement deal with Amazon (AMZN) in 2019 where Amazon has agreed to provide Trade Desk access to inventory on its Fire Platform to place advertising for premium TV content providers. This is a significant deal for Trade Desk, because Amazon's advertising business is rapidly growing, and Trade Desk will be well positioned to help advertisers access this inventory. Such a move by Amazon to open its inventory placement to 3rd parties like Trade Desk also helps to reduce regulatory scrutiny of the company.
A Bridge to China for Multinational Brands:
The Trade Desk has recently expanded its platform to tap the explosion of interest in global brands advertising in China. The platform remains one of the few ways to help multinational brands access Chinese inventory across the premium content destinations, without need to deal directly with the Chinese platforms themselves. The Trade Desk has been able to aggregate inventory across Tencent (OTCPK:TCEHY), Baidu (BIDU) and Alibaba (BABA) properties to deliver in country ad inventory for brands into the Chinese market.
TTD is a business that has successfully grown revenue at a rate above 45% annualized over the last 3 years, and has a return on invested capital that is close to 16%. For an emerging leader, this is quite unique and speaks to The Trade Desk's exceptional financial discipline. As TTD's markets are still growing, I expect that TTD can continue to reinvest earnings in similar high growth market opportunities for years, and reap very good results, which, if it can be sustained, will generate exceptional long-term wealth for investors. TTD retains much of the value it creates, and sports net margins of 18% and generates good operating and free cash flow.
The near-term outlook for the Trade Desk may look a little murky, given the broader macroeconomic picture that is at play currently. Advertising budgets are typically the first things to get minimized in economic downturns because of the ease of optimization. TTD's share price has also had a very strong run in the last 3 months, more than doubling from bear market lows.
At current prices, the Trade Desk also trades at close to the highest valuation multiples in quite some time. Make no mistake, however, this business is riding multiple secular tailwinds in providing transparent advertising spend, new inventory in audio and connected television access to China's advertising ecosystem.
One look at Trade Desk's share price history suggests a volatile name which periodically offers exceptionally attractive times for investors to step in and grab a bargain. While now may not be one of those times, make no mistake, Trade Desk's business is positioned for better times ahead. In the words of Charlie Munger,
If a business earns 18% returns on invested capital, over 20-30 years, even if you pay an expensive looking price, you'll end up with a fine result.
With considerable future growth opportunities in front of the Trade Desk, it is just possible that investors in the business still end up with a "fine result".
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This article was written by
I am an investor who is focused on disruptive businesses that are transforming industries lead by visionary leaders with substantial skin in the game. I have spent nearly 20 years in a formal capacity in various investment banking and corporate advisory roles, having attained my MBA with a concentration in finance. This led me toward a path in Venture Capital and working with entrepreneurs building new technology businesses, and I have had the opportunity to not only invest in a number of amazing privately held businesses, but also play a meaningful role in growing several of these early stage enterprises as well. I am now focused on applying my lens of private market disruption and leveraging secular tail winds to the public markets. This was a journey which I started with my public Project $1M portfolio series and which I have deepened with my marketplace service, Sustainable Growth
Analyst’s Disclosure: I am/we are long TTD, FB, GOOG, BABA, BIDU, TCEHY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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