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The Trade Desk (TTD) Stock | NASDAQ: TTD

The Ad Buyer’s Platform

The Trade Desk is the largest independent Demand-Side Platform (“DSP”) that set out with a mission to wholly serve the interests of advertising buyers. The Trade Desk believes that the old ways of advertising are over – no more middlemen, lengthy negotiations and contracts, and lack of real-time insight into how a company’s advertising campaign is doing. By focusing solely on buyers of advertising, The Trade Desk inadvertently helps ad publishers – both sides benefit from relevant and creative ads being shown on various forms of media to drive views, clicks, and sales.

DSPs, like The Trade Desk, will be lifted by tailwinds in the digital advertising space. Global spending for digital advertising spending is ramping up, adoption of a myriad of new devices, growth in media consumption, and low international penetration provide a long runway for growth. The Trade Desk’s data-driven and cloud-based model set it up for success in our digital world as clients discover the value of high-quality data to drive results through advertising campaigns.

Growth

100

Valuation

0

Quality

75
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Where Are We Now

Updated on: 11/8/2021

Conviction Score

8

Like a stock trading brokerage account, ad buyers and sellers can “trade” ad space on The Trade Desk’s ad platform. We think The Trade Desk’s “marketplace” ad platform today is best positioned for the shift of advertising from the physical world to online means while helping ad buyers and sellers alike.

  • The company reported explosive financials and the stock reacted explosively to the upside as well. Revenues are up 39% since last year and profit is up a whopping 44%.

  • Customers are not contractually tied to The Trade Desk’s services but an astonishing 95% of them use The Trade Desk time and again. The Trade Desk enables access to huge advertising growth trends, including effective advertising media like Connected TV, computers, and mobile.

Investment Thesis

  1. The Trade Desk operates the world’s largest independent DSP used by ad buyers to create, manage, and optimize data-based digital advertising campaigns to place effective ads online. The platform serves almost 900 large clients, and it has partnered with over 200 entities to facilitate the purchase and sale of ad space online.

  2. The platform has inherent network effects, thanks to the benefits buyers and sellers reap from the existence of The Trade Desk. The company also benefits from high switching costs and operating leverage, making the company more profitable as more clients and partners are onboarded.

  3. The Trade Desk should continue to grow at rapid rates because of growing digital advertising spend, low international penetration, and possible vertical use cases beyond the advertising silo.

  4. The Trade Desk faces severe valuation risk as shares at a high multiple of sales . Other risks revolve around Google’s announcement to remove third-party cookies in 2023, client concentration, and high growth expectations.

  5. The company is set to benefit from a rise of programmatic advertising on Connected TV ("CTV") platforms as consumers continue to cut traditional linear TV services and advertisers seek more effective media to increase brand awareness.

The Basics

The Trade Desk first launched its proprietary self-service, cloud-based, data-driven platform in 2011, originally targeting the display advertising channel before moving into additional formats, including video, in-app, audio, CTV, native, and social advertising.

The company was formed to fill a gap in the industry – provide an independent media-buying platform focused entirely on the demand or buy side. For this reason, The Trade Desk is considered a Demand-Side Platform, DSP, and it is the largest independent one that exists today.

Ad buyers use the platform to create, manage, and optimize data-based digital advertising campaigns to place media online effectively. The platform integrates with partners in the advertising space, including those involved with inventory, publishers, and data organizations.

How the Platform Works

The Trade Desk’s platform enables the use of programmatic advertising – the buying and selling of advertising inventory (i.e., the total amount of space publishers hold for public advertisements) through various electronic media – as opposed to traditional advertising. Programmatic advertising differs from traditional forms in the following ways:

  • Bidding and Efficiency– Traditional forms use negotiations and ads are traded manually between ad buyers and publishers; Programmatic advertising uses electronic methods to perform automated, real-time bidding (“RTB”), enabling ad space to be purchased instantaneously without the need for lengthy negotiations through the middlemen.

  • Pricing – Traditional advertising generally has predetermined, contractual pricing negotiated between the buyer and the seller; Programmatic advertising leverages RTB to effectively place ads in spaces and for a price that best suit the advertiser’s objectives.

  • Data and Analysis – Traditional advertising data lags the campaign at hand and is collected from various sources; Programmatic advertising data is used in real time to optimally place and maintain an ad campaign throughout its duration for maximal impact.

  • Interests – In traditional advertising methods, the ad server (which operates under the publisher, a seller) would place ads based on the advertiser contract; Programmatic advertising is based solely on supply, demand, and data, protecting the interests of buyers, placing their ads only when it is most effective for them to bid.

Helping Ad Buyers Succeed

The Trade Desk operates as a DSP with a mission to represent the sole interests of the buyers.

In contrast to the ad server acting as the source for traditional ads, an independent ad exchange (i.e., where advertisers and publishers buy and sell advertising space) is the source for programmatic ads. When a webpage is loading, the webpage sends a request to the ad exchange to fill ad space on its page before it finishes loading for the viewer to see.

The ad exchange acknowledges, processes, and transfers the request to all registered DSPs, who represent buyers, for bids on the ad space available.

The DSP, like The Trade Desk, uses proprietary data and algorithms to determine which advertiser could best fill the ad space based on;

  1. relevance to the audience or viewers

  2. creativeness for appeal and effectiveness by answering “how?”, “where”, and “by whom?” a certain advertisement will be viewed.

DSPs will tap into their databases to determine how much ad space is worth to each of their advertisers and assign a bid to each advertiser. The highest bid wins and that advertiser will get the ad spot.

This entire process occurs within mere seconds and should come with no surprise.

How TTD's Platform WorksSource: The Trade Desk YouTube Channel

When we load a webpage and see advertisements pop up on different areas throughout the page, it is likely we had just witnessed an entire cycle of a sale and purchase of advertising space for us to view. The process is similar across all forms of digital media and content.

Customers and Suppliers

The Trade Desk’s customers are purchasers of programmatic advertising inventory and data. Specifically, The Trade Desk’s customer base of 875 consists largely of advertising agencies or groups within advertising agencies.

The company has a fair amount of customer concentration given the fact that three clients – Omnicom Group Inc., Publicis Group, and WPP plc – each represented more about a tenth of total billings.

Digital advertising space is obtained from over 80 ad exchanges and sell-side platforms. The Trade Desk is also integrated with over 200 third-party data vendors whose products can be purchased on The Trade Desk’s platform.

Financials

The Trade Desk is a secular outperformer, having grown revenues at many multiples above the 2015 amount. The company has also turned a (growing) profit in each year since 2013, only two years after the release of its platform.

While most new technology companies cannot turn a profit for many years, the path to profitability was a quick one for The Trade Desk.

The Trade Desk Select Financials ($M) (Q3 2021)

The Trade Desk’s strong revenue growth can be attributed to the recurring revenue profile of the business.

Clients typically initiate usage of the platform by signing a Master Service Agreement (“MSA”), usually for a term of one year with automatic renewals for additional one-year terms, unless cancelled by either party with 60 days’ notice. The Trade Desk generates revenue like a toll booth – it collects revenue from a platform fee based on a proportion of a client’s total spending on advertising.

The Trade Desk retains about 95% of its clientele on a year-after-year basis, implying a relatively low and consistent churn rate in the mid-single digits and a substantial portion of its revenues are recurring. Additionally, these clients tend to increase their usage of the platform over time all while the entire customer base is expanding.

Despite the level of customer concentration, The Trade Desk is reasonably diversified across the industries it supports. The three largest industries it serves are Health & Fitness, Food & Drink, and Automotive. Operations are heavily concentrated within the United States where almost all of its revenues are generated. The Trade Desk has international operations, but they are much smaller in size than the US.

The Trade Desk Spending Per Industry (Q2 2021)

Source: The Trade Desk Investor Relations

Competitive Advantages

The scale, growth in adoption, and nature of the platform as a cloud-based, data-driven model create a powerful network effect for clients of The Trade Desk.

The Trade Desk operates for and in the best interests of clients on demand side, but the platform facilitates a “marketplace” of buyers and sellers by connecting buyers to ad exchanges.

How Network Effects Help TTDSource: The Network Effects Bible - Guides.co

The more ad spaces and partners that enter The Trade Desk ecosystem, the better the outcome for advertisers who choose The Trade Desk as variety and odds of placement are high.

The Trade Desk’s data-driven model will also grow more powerful over time as collects data to get smarter and offer better outcomes for its clients. In turn, more sellers would be attracted to The Trade Desk’s platform, making it more valuable for all parties involved as the platform scales.

The Trade Desk clearly benefits from switching costs, both tangible and intangibles, as demonstrated by the 95% customer retention rate. Unlike many competitors, The Trade Desk uses MSAs rather than campaign contracts.

Clients commit to one-year terms with automatic renewals of additional one-year terms. Albeit a relatively short contract term, clients tend to stay with The Trade Desk after the initial term and tend to increase their usage over time, which alludes to the premise that The Trade Desk operates for ad buyers to drive results that are difficult to obtain at competing platforms.

These switching costs benefit The Trade Desk in two main ways:

  1. Customers are staying and expanding the client base of the platform

  2. Customers generally become more profitable over time.

This leads to our third competitive advantage - operating leverage.

The software model is self-service, meaning the platform is only built once to accommodate many clients. Besides aggressive research & development and sales, marketing & advertising expenditures to grow and improve the business, the model will likely require maintenance spend once The Trade Desk reaches some level of maturity.

The Trade Desk will become more profitable over time as those “growth” expenditures come down and the company reaps the benefits of its fixed-cost, subscription-type business model. Growth spend will likely remain high in the foreseeable future, given research & development expenditures have been ramping up and eat up a large portion of sales. The Trade Desk is seeking to solidify its place in the market, and it is investing accordingly to reach this goal.

Opportunities Ahead

Shift to Digital

The world is undergoing a digital revolution, and the advertising space is no exception. We are in the early stages of what will likely be the golden age for consumer technology. Technologies such as 5G, Internet of Things, edge computing, and cloud computing enable the use of a myriad of new devices and use cases we have not yet seen before.

The number of smartphones and other new devices in our hands or at home, along with increasing data consumption from expanding use cases and 5G wireless connectivity means more eyeballs glued to screens rather than “archaic” forms of media, such as linear TV, newspapers, magazines, billboards, and other print.

Advertisers have an advantage today they wish they had in the past – real-time data.

In the past, advertisers could only check how a certain advertisement or campaign performed through a post-implementation review, that is, after the campaign was over. Real-time data advertising platforms, like The Trade Desk’s platform, collects data and places advertisements when they are relevant and useful to certain audiences.

This drives better business outcomes for advertisers, allows them to monitor their performance in real time, and they will capture greater value for money more often than not.

Digital Ad Spending graphed from 2019-2024Source: eMarketer

Businesses and advertisers are hungry for data-driven marketing, and The Trade Desk is uniquely positioned as a data- and cloud-based advertising DSP as the global share of spend on digital advertising increases from about half of all ad dollars to almost 70%.

Connected Television (CTV)

In the shift to digital and away from traditional linear TV, CTV is the fastest growing media segment, accelerated by the pervasive stay-at-home orders around the world and the general cord cutting trend that was in place before the pandemic in favour of services such as Roku, Google Chromecast, Amazon Fire TV, and Apple TV.

According to eMarketer, Pay TV viewers in the US have been steadily declining over the past several years. This should be alarming to companies advertising on linear TV channels as fewer eyeballs are captured using traditional forms of advertising.

On the contrary, total hours spent on CTV devices was up about 80% in 2020 versus the year prior, and there are now over 180 million CTV viewers in the US alone. Advertisers are acting accordingly and are expected to dedicate a greater percentage of their advertising budget towards CTV devices. Total CTV ad spend is expected to increase from about $8 billion in 2020 to over $18 billion in 2024.

We believe The Trade Desk will benefit substantially from this trend towards CTV – its omnichannel approach, digital capabilities, growing user and partner base, and data-driven model will prove to be valuable to advertisers seeking a programmatic ad platform.

Connected TV Viewership GraphedSource: eMarketer, The Trade Desk, YouGov

International Expansion

The Trade Desk’s operations are heavily concentrated within the US, but the opportunity is much greater on a global scale. Only a fraction of total spend on The Trade Desk's platform came from non-US regions even though almost two-thirds of ad dollars are spent outside North America. Although this revenue split may seem low, it is important to note that The Trade Desk is growing faster on an international scale than in North America. Since 2015, non-North America revenues grew from 6.5% of total revenues to about double the amount now.

The company has already and will continue to make efforts towards a broader international expansion. In 2019, The Trade Desk launched in China, where over 20% of the world’s internet users and 400 million middle class consumers reside.

TTD's Global PresenceSource: Q2 2021 The Trade Desk Investor Presentation

The Trade Desk is beginning to reap the benefits from investments in the EMEA and APAC regions and should see international reach and revenues scale as penetration increases and the rise of the Asian middle class serve as tailwinds for its platform.

Vertical Optionality

The Trade Desk announced a groundbreaking partnership with Walmart to boost the capabilities of Walmart Connect, a segment of Walmart seeking to harness its omnichannel presence and unique retail shopper data, to provide advertisers with ways to leverage Walmart digital properties. These digital properties include 170,000 TV walls and self-checkout screens across 4,500 Walmart stores. Approximately 150 million visitors step into Walmart stores weekly and 90% of the US shops at Walmart to some extent.

We believe this partnership is a win-win relationship to all parties involved, and this is a testament to The Trade Desk’s place in the market.

Walmart can ramp up usage of Walmart Connect by leveraging the metadata capabilities of The Trade Desk, a platform that would cost loads of money and time to build in house. Ultimately, shoppers will view more relevant ads while shopping, helping drive sales while the customer is in an environment where products can be purchased.

Walmart's New InitiativeSource: Walmart Connect

The convenience of this form of advertising is unmatched, and The Trade Desk can help ad buyers (and Walmart) advertise using exclusive access to data of one of the largest consumer groups in the world – Walmart shoppers.

We believe this is the tip of the iceberg for The Trade Desk’s optionality.

The Trade Desk can partner with sellers and still serve the unique needs and best interests of ad buyers. Partnerships such as Walmart Connect provide ad buyers with yet another medium to advertise their products to a niche consumer group. Businesses around the world may see the value in this arrangement.

Not to mention, as The Trade Desk’s platform expands across use cases, its data capabilities will likely have many uses outside of advertising, such as marketing, sales, and digital media. The overall premise is this – you can do almost anything with quality data, and The Trade Desk has it.

Risks

Customer Concentration

Three clients each make up more than 10% of gross billings. This level of client concentration could significantly impact financials if any one of these clients removed themselves as clients.

Cookie Phase Out

Ad companies are heavily reliant on third-party cookies to show relevant ads to users – Google’s announcement to retire third-party cookies from its platforms in 2023 could harm advertisers significantly. The Trade Desk is largely immune from this change given the announcement of Unified ID 2.0 (“UID 2.0”), an alternative to cookies that gives users greater control and transparency over their privacy, as well as anonymity. However, UID 2.0 requires an “opt in” from consumers, something users may be reluctant to do. If UID 2.0 gets lower-than-expected opt-ins, advertisers may seek alternatives to The Trade Desk.

Valuation

The Trade Desk’s thesis and valuation implies lots of investor confidence in prospects for the business. Deterioration of the strong CTV and digital advertising trends or the broad reopening of economies and global travel may remove viewership on media that benefitted from COVID-19. The Trade Desk may face adverse financial effects and slower adoption of its platform.

The Trade Desk’s valuation is extremely expensive, traditionally speaking. If The Trade Desk does not meet the growth expectations of the market, multiples could compress substantially and lead to financial loss.

Bottom Line

The Trade Desk worked hard to get to where it is today, and it is now reaping the benefits of a once-in-a-lifetime acceleration in viewership of digital media. The data-driven, cloud-based model sets the company up for success. Clients are hungry for better data as old ways of advertising shift over onto digital forms, a facet of the market The Trade Desk specializes in.

Network effects, switching costs, and operating leverage prepare the company to take on any potential competitors now and in the future. The platform is sticky, most clients are retained, and they increase usage over time due to the capabilities and success of the platform.

Lastly, the company is poised to grow substantially, albeit at a high price. The stock is nowhere near cheap, however, the growth prospects in digital advertising, adoption of connected TV, international expansion opportunities, and optionality could justify the stock price. Only time will tell, but one thing is for certain – The Trade Desk is one of the highest quality software as a service companies on the planet.

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