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The Trade Desk (TTD) Stock | NASDAQ: TTD

Covered by Stratosphere

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.

Stratosphere Score

8

Growth

10

Valuation

3

Quality

7

Margins

8

Dividend

0

Balance Sheet

10
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

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.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

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

  • 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. Businesses and advertisers are hungry for data-driven marketing. 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%.

  • In the shift to digital and away from traditional linear TV, CTV (i.e., connected TV) 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. Total hours spent on CTV devices was up about 80% in 2020 vs. 2019, 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.

  • The Trade Desk is expanding internationally. 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.

  • The Trade Desk can act on the platform's 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 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.

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.

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