The Trade Desk: The Best Is Yet To Come

Summary

• 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.
• Looking for a portfolio of ideas like this one? Members of Sustainable Growth get exclusive access to our model portfolio. Get started today »

Business Summary

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.

Investment Thesis

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.

Financial Summary

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.

Outlook

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.

Source: Morningstar.com, TTD share price

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".

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.

Comments

[ijeff]

TTD is pushing towards its 52 week high. Its had an incredible run since its March 18th low. What a great opportunity in March if you took advantage of it. At current price level I can't buy even a small number of shares. Maybe it will come down to a more reasonable price or maybe not. Either way, I wait.

[idahoradm]

@ijeff - TTD made all time highs in early May. Not sure what you mean pushing towards 52 wk high.

I added not at the lows by during the deep correction. 100% return in a couple of months for the add. This is a company that will make you regret ever selling. I trimmed my position a couple weeks ago because I thought we were going into a minor correction, but was lucky to buy it back again before this latest run to 380+. It's not smart to try that with your long term holdings.

I bought my first position at $144 and thought I was late to the game.

[Gadzman_33]

I remember buying a little search company called Google at $110 and a lot of investors thought that the price was too high !! You know the rest ..... Buy and hold The Trade Desk for 10 years. Long TTD since $154 .

[Jlagreen]

I learned my lesson when I bought Amazon for $200 and sold for $400 because it seemd overvalued at that time.

Not doing such a mistake again. Got into TTD at sub $60 and will hold another 20 years. I see potential for a 100-bagger and I want to fully benefit if it happens.

[ijeff]

I've never experienced that. Its got to be the most satisfying aspect to investing if you can achieve it. I've always stayed away from companies like TTD to my detriment. The big question is will TTD be the big winner you anticipate or will something else come along and blow it away;i.e., Facebook vs My Space.

[Jlagreen]

@ijeff
Of course, there is risk. Especially, if you focus on a single company. Anything could happen. Even an external event like COVID-19 which can break any strong company within a few months.

But with large risk there is also large chance. Or who could have imagined that an online book store would become a 1 trillion dollar company some day?

What I like about TTD is that unlike Google/FB, it isn't a market leader so it doesn't have to protect as much market share. For Google/FB regulations and losing market share could lead to stagnation even if overall market is growing. For TTD achieving a goal of 10-15% market share in digital ad tech would make it Large Cap in decades from now. It's not impossible because TTD has options to bypass competition of Google/FB like Mobile/Audio/CTV and Region (Asia, China).

As I said many times, 10% market share in 20 years in digital ads could result in >100 billion ad spend on TTD. This would lead to ~20x revenue of today. Will it be easy? Hell no, but chance is there that TTD will reach this goal and might even succeed. If TTD gains even more share then I might not have to wait 20 years for retirement :D

[Carl 123]

motley fool pushing it

[robert paulson 77]

have to give the author some credit for noting they are volatile, near ath and now might not be the best time to invest. just keep it 100 my ninja.

[CWatsonSD]

@Carl 123 For a while now. Happy they are.

[Uncommon Wisdom]

I know this industry very well. There are hundreds of players doing -- in a broad sense -- the same thing as TTD. Certainly they are one of the top 5 - 6 players in the US; probably not globally. Keep in mind that new ad tech platforms are launched about as often as most people change their underwear. And many of them are new potential disrupters, although few every end up disrupting anything. The digital ad market is very depressed right now. No airlines, travel, hospitality, restaurant, event, tourism, amusement, entertainment, movie ads running, and no/few local retail / mall / shopping ads running. Even with lockdowns ending (maybe temporarily), we are entering the new normal. Advertising will remain week the rest of 2020 and probably much of 2021. Maybe I'd look at TTD as a speculative investment with some play money if and when it were to decrease 50% from the current sp.

[DomL]

the problem with this is Algos. they already discounted the price faster than most humans can react. the time to get that cheap price was 140-160. If you nailed it good, if not you might be a skeleton waiting for cheap prices unless markets implode but won't happen until monetary policy dries up. Its a bubble just enjoy it

[canyon]

So, DCA. Buy 1/2 or 1/3 of your position now, at these high prices... if it goes down, you're happy and you get the rest as you planned, if it goes up, then at least you're not one of those "I've been waiting four years to buy this watching it increase 2x or 3x or 4x, but I don't pay up for growth!" types.

[ijeff]

I'd wait. Even a 50% buy at these prices seems too high. Maybe we won't see March 2020 pricing again but something closer to that will most likely occur maybe even this year. One dose of bad news in this economy will send a high growth volatile stock like this crashing.

[ArtfulDodger]

Fellow Investors:

I have no idea how a serious investor can invest in a company that is selling for 200 x FCF, 19 x sales, has a huge gap between its GPM (75%) and its NPM (16), and has for some reason popped up over 100% in the last 3 months.

To TTD's credit, the company doesn't have a lot of debt, it is at least making money. But the internal ratios are so far out of line that you can't even call it investing to buy TTD. It's spinning the roulette wheel.

Folks, there are better and much safer stocks to put your money in. They may not (well, definitely do not) have the luster, the chic' that TTD does. But you'll have a chance to make a decent return on your money over the next couple of years.

These are a few of my holdings that are still selling at reasonable prices and will pay you an excellent dividend while you wait for the potential capital gain: ABBV, AX, FOXA, KEY, PFE, RF, and HTGC.

AD

[Frza]

@ArtfulDodger no front but I'd rather have Trade Desk in my portfolio than most of your reasonably priced stocks which at best went nowhere (some of them were even massive capital destroyers) over the last years (neither stock price nor the business).

If I take your stocks I have the certainty to underperform the market. In this case I would definitely go for a S&P 500 ETF. At least with TTD you have the potential for a tenbagger and worst case is that it performs like your mentioned stocks.

[DomL]

value is dead. All those stocks are literally no growth. TTD has growth. You gotta pay up for good stuff

[DomL]

@Frza this guy gets it

[SuperM]

I understand the differentiation from the behemoths like Google and Facebook in digital advertising. But, why can't Google and Facebook come up with a similar offering and knock The Trade Desk down?

[DomL]

they have their own ecosystems..... And its near impossible for these companies to penetrate asian markets. I thought i'd never say it..but being third is best. TTD can capture such a huge part of the market and remain neutral,

[SkiManJamie]

It's more than just the technology, it's also business strategy.

TTD is only a demand side platform, building relationships and trust with its clients such that the clients share their proprietary information with TTD to get better advertising results. And TTD brings a level of transparency Google and Facebook don't. Google and Facebook aren't going to create an offering that compares their pricing/effectiveness to other platforms and enable advertising on other competitive platforms.

[Corneroffice]

This looks like an interesting company. But How can you be confident in the stock at 116x EBITDA and 23x revenue? Those are stratospheric numbers and growth would need to be strong for many years just to get the multiple down to a more reasonable range (assuming no appreciation).

[Integrator]

This is one of those plays where I would humbly submit you almost need to think like a VC and look out 5-10 years as to what the market landscape may look like. Advertising is a $725B market, where digital today is ~50%, and steadily rising and taking share from traditional. Assume that continues steadily over the next 10 years such that digital grows to 75% of the market or $543B . If TTD can even capture 5% of this over that period (assuming Facebook, Google, Amazon carve up all the rest, unlikely given how regulations are moving, but lets suppose for argument sake.

That would still be a revenue pool of $27B for TTD, annualized, compared to <$1B today. PE's and Revenue multiples make it hard to contextualize the opportunity today. Of course, this type of an approach to assessment of the investment case only really works if you believe some of the underlying secular trends, and TTD's place to materially influence these.

[Integrator]

With a take rate or margin of roughly 20%, TTD could be doing 7-8x of what it does in revenue today within a 10 year period.

[Frza]

@Corneroffice With TTD there is the hope to hit the next tech giant. AMZN or CRM were also high growth businesses for years with low debt and barely writing profits. Here you have a disruptor of the internet advertising business.
But I can understand concerns. It is definitely not sure that TTD will be the dominator in 10 years. Therefore, I just have 2 shares because a lot of hope is baked into the valuation.

[SkiManJamie]

I think TTD is a very interesting company and investment. I trimmed a good chunk of my position around $300 and above after having bought a bunch at $149 a month earlier. It's still a good position in my portfolio and I see it being worth more in the future than it is today, I just locked in some gains and redeployed the cash to other positions.

In addition to China being a new market, the company has low share in Europe which presents a huge opportunity given the ad market in Europe is massive.

[Integrator]

Agreed. The platform is extensible and scalable, and there are no real geographic restrictions. In fact its value proposition will likely find a more favorable audience in Europe given pushback against Google and Facebook in Europe on antitrust concerns.

[csrsc]

Everything sounds good then why no options interest?

[Michael Dolen]

Sold 1/3 at $255 thinking I would buy it back $50 cheaper. It never went more than a couple dollars below my sale price.

Lesson? Hold, don't trade $TTD.

[Integrator]

Absolutely, this is a stock to hold and bottom drawer. The costs of trading it and taking a short term 30% or 50% are too great with businesses that may grow to be 3-5x your invested capital.

[canyon]

Agree, don't take profits on long term investments back by long term macro trends and company specifics. Hold and DCA.

[STAY HUMBLE]

thank you for a great article. I learned alot about TTD. I'm doing a trial at your site. I believe your one to really learn from. I do have a question probably dumb one at that . But, what is a good entry here ? I believe the MC will triple in the future. I was thinking things might pull back when we get Q2 ER . thanks again.

[Integrator]

Thanks for your feedback. TTD does periodically pull back meaningfully every now and then on corrections, so one can wait for those times. That said, the business has generated earnings growth of 75% annualized over the last 3 years. While it currently trades at 80x earnings, 3 years of ~40-50% earnings growth will bring this ratio down to a ~25x P/E . The key here is how big the opportunity is and how far it can grow, but even at these levels, I still think there is some good upside. No doubt at levels <$250 I think the odds of long term mid teens or greater returns are pretty high.

[STAY HUMBLE]

thank you

[HardytheTrader]

$TTD is the kind of stocks where you can buy all the dips and win big!

Long TTD

[Tall Seller]

I realize Builtwith isn’t bang on accurate but I would still like someone to explain to me why that site shows TTD’s customer count is CRASHING...it could be that that TTD doesn’t have trackable code any more but I doubt that’s the reason. WHY? Or, is it true?

SEE HERE: trends.builtwith.com/...

[banz23]

That's not tracking CTV or audio advertising where TTD is focused. That's just looking at advertising on websites. It shows TTD has been "crashing" since 2017, but clearly TTD has seen tremendous growth in the last 3 years.

[Tall Seller]

A businesses can still have growth in revenue but CRASHING customer counts. 

I say the customer count trends are more important that revenue.

How do you know that Builtwith isn’t tracking what you suggest too?

[bonanzzzer]

TTD proudly states that is has a 95% customer retention rate for something like the last 25 quarters. While they do have lots of individual customers, two of their customers are large ad agencies that help produce content and manage ad campaigns for their customers (who might typically not have marketing departments large enough to do their own ad buys). Despite CTV and audio revenues growing faster than good old mobile revenues, mobile is still their largest revenue stream.

[idahoradm]

Great article. Long since $144. Visionary Leader Green. I trimmed shares today. Will buy back more than that later.

[Integrator]

Great leader makes a huge difference to execution and whether a business can achieve its potential. Jeff Green is such a leader.

[canyon]

Nice article. TTD was on my list for over a year, I just wouldn't pony up... but when the March lows hit (or close, I picked up at $161 not the $140-something low) I got in. It's DCA now.

It's ok to wait, sometimes one misses a great company and must move on to others... or just DCA and start.

[cgm]

It's priced around 100 times 2021 earnings expectations. A bit too high for me. (Pricier than AMZN, SQ, TSLA, NOW, NVDA, AMD, GOOG, FB, AAPL, and many other fine tech stocks.)

[HUANMIN WU]

How abt growth rate compare to these stocks?

[Integrator]

I don't disagree that 100x earnings is a traditionally high valuation. One of the biggest mistakes that I've made in my investing thus far is estimating just how strongly these businesses can grow into the future at such a rapid rate.

[canyon]

P/E alone is close to meaningless, it's PEG (P/E/G) that one should care about.

A P/E of 25 in a company growing at 50% is CHEAPER than a P/E of 10 in a company growing at 3%.

[DaveJulio]

Thanks Integrator. I'm curious why TTD is not in your $1 million portfolio!

[Integrator]

Hi, so TTD was an addition to my marketplace service in September last year, and its in those names in that service that any new capital that i have is being invested.

[dick9999]

I sold way too early. But what an elegant and powerful business. I also like the CEO. Suggestions re a reasonable entry price? Thanks

[fm.dividend]

The entry price is now. Start nibbling. If you plan on holding for the long term (5 years minimum), your starting position doesn't really matter much.

10 years from now, your investment will be many times what it is today

[Gary Kime]

Dick9999,
There will be plenty of pullbacks in this stock. Be patient and get it around $200.

[Gary Kime]

Dick9999, I don’t know if you have ever sold cash covered puts, but that will put you in the stock at 30% below where it is trading today. Google “stock options channel”, enter Jan 2021 cash covered put at around $300. An excellent way to work into a position on a volatile stock!

[charles1222]

How does Roku compete with TTD or does TTD buy ad space on Roku?

[maphead]

From what I've read, Roku has traditionally been a partner but in late 2019 bought their own DSP, Dataxu. (Note to tech bro morons: please name your company something I can pronounce.) So they may adopt a walled garden approach like Google and Facebook.

[Integrator]

They are also quite different businesses. Agree with Roku eventually moving walled garden with DataXU but TTD aggregates much greater set of inventory across other format types. I believe Roku will struggle to penetrate much beyond its connected TV impressions/subs. TTD's neutrality and more diverse range of connected content and ability to transact across a broad range of inventory in a single shot will resonate much better with agencies and buyers.

[maphead]

Agree, and you'll have the issue that as TTD's target platforms get converted to walled gardens, TTD has less to sell and is less diverse. And all that is not under TTD's control. A basic business risk for TTD.

[Legend of the Growth Investor]

Great work as usual Integrator. Thoughts on the other side of the ads coin for the Rubicon Project?

[Integrator]

Its an interesting business, taking on the supply side consolidation from a publisher perspective, now with a connected tv business. Ultimately, you need scale to being a meaningful player, and Rubicon doesn't have that yet. Also its financial picture isn't necessarily as healthy as I would like, but to be expected as an early stage business. Its not for me at this stage, but one to watch on continued scale and traction.

[idahoradm]

@Integrator RUBI, combined with the still recent merger with Telaria is the largest sell side platform. I think RUBI still needs more time to integrate with Telaria. But they should have a strong chance to become the go-to platform on the sell-side. RUBI already has some of the largest clients such as HULU.

[CWatsonSD]

Does it mean anything that so many SA folks are writing about TTD? Is it a bullish sign? I hope so. When I first listened to a conference call a few years ago I was hooked. I fully expect this to be a 4 digit stock by the end of 2021. Market is growing and they are smart. Keep writing about them.

[dick9999]

Do you have any suggestions re an entry price? Thanks

[OrbitRigel]

If the price will triple in 6-7 years, the entry price is not so important.

[Integrator]

For what its worth, I've been in the business coming up to a year, and its one I have no indication of parting with. The opportunity is quite substantial.