Saga Partners - The Trade Desk: A Volatile But Likely Very Lucrative Journey

Aug. 28, 2022 12:31 AM ETThe Trade Desk, Inc. (TTD)AMZN, GOOG, GOOGL, META4 Comments

Summary

  • We first purchased The Trade Desk in Q4’17.
  • TTD does trade for a high multiple based on recent fundamentals.
  • TTD is expected to have ~$8 billion of ad spend in 2022.
  • TTD should continue to take share of programmatic ad spend going forward rising from an expected ~16% share in 2022 to 25% share in 2028.
  • For now, we are happy holding on tight to our TTD stock for what is bound to be a volatile but likely very lucrative journey.

Marketer using a computer to digital online marketing banner web icon for business and social media marketing, content marketing, viral, SEO, keyword, advertise, website, and internet marketing.

Khanchit Khirisutchalual

The following segment was excerpted from this fund letter.


The Trade Desk (NASDAQ:TTD)

The Portfolio first purchased The Trade Desk in Q4’17. The Trade Desk is a software platform that helps advertisers filter, value, and purchase the supply of digital ad inventory (display, mobile, social, connected TV, connected audio) available across the world. There is a long-term secular trend of more media moving online, providing the advertisers the ability to use data to reach targeted consumers. The Trade Desk provides price discovery for advertisers by using data (programmatically) to value inventory for an advertiser’s specific goals.

In the digital advertising value chain, there is a marketplace where ad inventory is bought and sold. Sellers of ad inventory called sell side platforms (SSPs) run auctions for publisher’s inventory through ad exchanges, selling it to the highest bidder. Buyers of ad inventory, called demand side platforms (DSPs) like the Trade Desk, have to “look” at the auctions being run in order to potentially bid on the inventory for their advertising customers. Programmatic advertising provides the ability for one-to-one targeting using granular data to determine ROI on ad spend.

Trade Desk’s competitive advantage comes from its high operating leverage and economies of scale. In order to be effective, DSPs must look at all available auctions being run. Looking at each auction costs money even if no bid is made. The only way for the DSP to monetize “looking” is to win the auction. However, the more an advertiser pays for inventory, the lower the ROI on ad spend, but too low of a bid would risk losing the auction. Therefore, The Trade Desk helps the advertisers determine how much specific inventory is worth for their specific goals.

The Trade Desk picks inventory for its advertising customers from over 500 billion digital ad opportunities every single day, which is expected to cost over $300 million in platform operation expenses this year. If another DSP had half as much ad spend as the Trade Desk, to be as effective they would still have to look at all 500 billion ad opportunities, but platform costs per ad dollar would be twice as much. This makes it very difficult for a subscale DSP to be profitable.

Alternatively, the smaller DSP could just look at half of the ad opportunities, therefore cutting their auction expenses in half. However, they would have less premium inventory to choose from so advertisers would get a worse return on their ad spend. This naturally gravitates advertisers to the DSP with the greatest scale. Essentially, there is a minimum level of cost that a DSP must incur by looking at all available inventory in the world in order to provide a similar value proposition. This dynamic only increases as programmatic ad inventory proliferates in the future.

There is also a two-sided network effect. It costs SSPs money to send an impression out to bid to each DSP. SSPs only get paid if the impression is sold. Therefore, SSPs only want to send impressions to the DSPs that are most likely to win the auction. They concentrate bid requests to the scale DSP buyers like The Trade Desk. Then The Trade Desk can pick through all the available inventory, bid on the highest-return impressions, and refine its bidding based on historical prices, which improves return on ad spend and attracts more advertising dollars from its customers.

Advertisers want to use the DSP that has access to the most ad inventory because it increases the chance they will get access to the best inventory for their campaign goal. Having the most advertising customers attracts more inventory, which attracts more advertising customers.

While The Trade Desk has established itself as the dominant independent demand side platform, growing its relative advantage each year, it does trade for a high multiple based on recent fundamentals. When valuing The Trade Desk, question is how many ad dollars would have to go over The Trade Desks platform to justify a $20 billion market capitalization?

Long-term, global ad spend will continue to grow in line with the global economy, digital ad spend will grow as a proportion of total ad spend, and all digital ad spend will be allocated programmatically. For market perspective, global advertising spend was $780 billion in 2021, digital advertising made up nearly $400 billion of it, and programmatic advertising made up nearly $45 billion of digital. The Trade Desk is expected to have ~$8 billion of ad spend in 2022.

Over the next five years, programmatic ad spend is expected to grow at a 15% CAGR, reaching ~$120 billion by 2028. The Trade Desk should continue to take share of programmatic ad spend going forward rising from an expected ~16% share in 2022 to 25% share in 2028. That would provide gross ad spend on The Trade Desk of $30 billion and assuming a 20% take rate provides $6 billion in revenue, growing at a 30% CAGR.

Operating margins near end state are expected to be ~40% which seem possible given their relative competitive advantage to smaller competitors and the cost structure of their platform business model, providing $2-$3 billion in operating income.

Growing revenue 25-30% from a $1.6 billion base is not the norm when it comes to most businesses. Few have accomplished such feats. However few businesses have had a globally scalable platform like the Trade Desk that benefits from winner take most dynamics. Unlike most linear businesses, it does not get weighed down by size. The bigger The Trade Desk gets, the stronger its business gets. It has high operating leverage which requires nominal costs to support increasing ad dollars to go over its platform.

While the above scenario would result in a highly favorable outcome to shareholders, the big returns will not come from owning The Trade Desk over the next five years, but over the next 5-20 years. $25-$30 billion in ad spend in 2028 is still a drop in the global ad spend bucket. There is a potential future where all digital advertising is allocated programmatically over a single platform and that platform could very well be The Trade Desk, in which case it would be one of the most valuable businesses in the world.

But let’s not get ahead of ourselves, for that to happen the major digital media company walled gardens Alphabet (GOOG, GOOGL), Meta (META), and Amazon (AMZN), which control about 2/3rd of digital advertising, would have to come down and be part of the open internet, but that is a topic for a different letter. For now, we are happy holding on tight to our shares for what is bound to be a volatile but likely very lucrative journey.

table: The Trade Desk performance metrics

Source: Company filings, Factset, Saga Partners

Note: 2022E values are Factset consensus expectations, market cap and share price are as of 6/30/22.


Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Single stock ideas excerpted from fund letters published by Seeking Alpha.

Additional disclosure: DISCLOSURES & DISCLAIMERS


This document should not be the basis of an investment decision. An Investment decision should be based on your customary and thorough due diligence procedures, which should include, but not be limited to, a thorough review of all relevant offering documents as well as consolation with legal, tax and regulatory experts. Any person subscribing for an investment must be able to bear the risks involved and must meet the particular fund’s or account’s (each a “Fund” and, collectively, “Funds”) suitability requirements. Some or all alternative investment programs may not be suitable for certain investors. No assurance can be given that any Fund will meet its investment objectives or avoid losses. A discussion of some, but not all, of the risks associated with investing in the Funds can be found in the Funds’ private placement memoranda, subscription agreement, limited partnership agreement, articles of association, investment management agreement or other offering documents as applicable (collectively the “Offering Documents”), among those risks, which we wish to call to your attention, are the following:

Future looking statements, Performance Date: The information in this report is NOT intended to contain or express exposure or concentration recommendations, guidelines or limits applicable to any Fund. The information in this report does not disclose or contemplate the hedging or exit strategies of the Funds. All information presented herein is subject to change without notice. While investors should understand and consider risks associated with position concentrations when making an investment decision, this report is not intended to aid an investor in evaluating such risk. The terms set forth in the Offering Documents are controlling in all respects should they conflict with any other term set forth in other marketing materials, and therefore, the Offering Documents must be reviewed carefully before making an investment and periodically while an investment is maintained. Statements made in this release include forward-looking statements. These statements, including those relating to future financial expectations, involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Unless otherwise indicated, Performance Data is presented unaudited, net of actual fees and other fund expenses (i.e. legal and accounting and other expenses as disclosed in the relevant Fund’s Offering Documents”), and with dividends re invested. Since actual fees and expenses have been deducted, specific performance of any particular capital account may be different than as reported herein. Due to the format of data available for the time periods indicated, both gross and net returns are difficult to calculate precisely and the actual performance of any particular investor in a Fund may be different than as reported herein. Accordingly, the calculations have been made based on a number of assumptions. Because of these limitations, the performance information should not be relied upon as a precise reporting of gross or net performance, but rather merely a general indication of past performance. The performance information presented herein may have been generated during a period of extraordinary market volatility or relative stability in the particular sector. Accordingly, the performance is not necessarily indicative of results that the Funds may achieve in the future. In addition, the foregoing results may be based or shown on an annual basis, but results for individual months or quarters within each year may have been more favorable or less favorable than the results for the entire period, as the case may be. Index information is merely to show the general trend in the markets in the periods indicated and is not intended to imply that the portfolio of any Fund was similar to the indices in either composition or element of risk. This report may indicate that it contains hypothetical or actual performance of specific strategies employed by The Adviser, such strategies may comprise only a portion of any specific Fund’s portfolio, and, therefore, the reported strategy level performance may not correspond to the performance of any Fund for the reported time period.

Investment Risks: The Funds are speculative and involve varying degrees of risk, including substantial degrees of risk in some cases, which may result in investment losses. The Funds’ performance may be volatile. The use of a single advisor could mean lack of diversification and, consequently, higher risk. The Funds may have varying liquidity provisions and limitations. There is no secondary market for investors’ interests in any of the Funds and none is expected to develop.

Not Legal, Accounting or Regulatory Advice: This material is not intended to represent the rendering of accounting, tax, legal or regulatory advice. A change in the facts or circumstances of any transaction could materially affect the accounting, tax, legal or regulatory treatment for that transaction. The ultimate responsibility for the decision on the appropriate application of accounting, tax, legal and regulatory treatment rests with the investor and his or her accountants, tax and regulatory counsel. Potential investors should consult, and must rely on their own professional tax, legal and investment advisors as to matters concerning the Fund and their investments in the Fund. Prospective investors should inform themselves as to: (1) the legal requirements within their own jurisdictions for the purchase, holding or disposal of investments; (2) applicable foreign exchange restrictions; and (3) any income and other taxes which may apply to their purchase, holding and disposal of investments or payments in respect of the investments of a Fund.

The S&P 500 Index is an unmanaged index of 500 widely held common stocks. The S&P Index is not available for investment, and the returns do not reflect deductions for management fees or other expenses.

Saga Partners LLC is an independent registered investment advisory, providing portfolio management to individuals, retirement plans and institutional investors.

© Saga Partners LLC

Recommended For You

Comments (4)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.