TTD - The Trade Desk

[alwaysdrawing]

Why is The Trade Desk a good investment:

 

• Capital light software business with low marginal costs (high margin business)

• Platform with high stickiness of customers (>95%)

• Tailwinds from the switch to programmatic advertising platforms (e.g. connected TV)

• Very fast annual growth (>50% YOY revenue growth, 147% profit growth), while maintaining profitability during their current fast expansion.

 

The old way of advertising does not allow for individualized targeting, which makes it less interesting to consumers, and less effective for advertisers.  The Trade Desk is part of that broad shift to programmatic, and their business model is designed for scale.

 

Whereas traditionally advertising and ad-tech companies have relied on weeding out inefficiencies using arbitrage, over time those business models cannot achieve scale, as arbitrage opportunities disappear as you pour more resources into them. 

By contrast, The Trade Desk provides a platform to agencies and charges a transparent markup, which can earn a reasonable rate of return today, and continue to earn that return as more and more advertising switches to programmatic. 

 

Rather than cutting out ad agencies, The Trade Desk partners with them to allow agencies the ability to run campaigns.  The business model, moreso than most in ad tech, is based on that partnership, and as The Trade Desk grows, their data will continue to improve, and power the flywheel of the platform. 

 

The Trade Desk’s platform, similar to Google’s or Amazon’s in their early days, provides a moat to competition, as their data will improve more and faster than other demand side platform (DSP) competitors.  Also, the walled gardens of advertising (e.g. Facebook, Google, YouTube, SnapChat), may ultimately open to TTD for the incremental demand (for the smaller players), and for the larger players (Google, Facebook) possibly due to regulatory reasons or public pressure.

 

How big is the opportunity:

 

CEO Jeff Green says the current worldwide advertising market is ~$650 billion per year, of which currently $12 billion is in “price discoverable programmatic”, which is the market that TTD operates in.  Over time, both the amount of spending on overall advertising will continue to increase, and the segment of “price discoverable programmatic” will grow to become a much larger part of the pie. 

 

Especially with the fracturing of the TV market, and the rise of Netflix, Hulu, HBO Go, and other subscription services, there will be an increase in the amount of content delivered in a way that allows for programmatic advertising, especially as consumers become saturated with subscription models.  Disney/ESPN is just the beginning—millennials are used to not paying for cable, and as services start to need marginal revenue and growth, eventually they will open up to advertising, and especially to programmatic rather than traditional advertising.

 

Other information:

 

Who is the Trade Desk (Google Finance):

 

The Trade Desk, Inc. is a technology company. The Company provides a self-service platform that enables clients to purchase and manage digital advertising campaigns across various advertising formats, including display, video and social, and on a range of devices, including computers, mobile devices and connected television. Its platform enables a media planner or buyer at an advertising agency to purchase digital media programmatically on various media exchanges and sell-side platforms; acquire and use third-party data to optimize and measure digital advertising campaigns; deploy their, or their client's, own first-party data in order to optimize campaign efficacy; link digital campaigns to offline sales results or other business objectives; access other services, such as its data management platform and publisher management platform marketplace, and use its user interface and application programming interfaces (APIs) to build their own technology on top of the Company's platform.

 

What is Programmatic Advertising:

 

Programmatic Advertising is a term used in online advertising. It refers to the fully automated and individualized purchase and sale of advertising space in real time. It specifically tailored to users based on the available user data banners delivered. (Wikipedia). 

 

Essentially, programmatic advertising allows the data markers of users to be used in ad auctions for digital ads on websites, mobile ads, or on programmatic TV (Hulu, etc).

 

[alwaysdrawing]

Looks like Twitter may be in the process of opening up to DSPs to gain the incremental demand.  Could be a very good thing for the Trade Desk, and if successful could help open other walled gardens.

 

From the Twitter Q3 Earnings Call:

 

Ross Sandler - Barclays Capital, Inc.

 

Hi, guys. You have two questions. So one on the programmatic you mentioned in the letter that you're in Alpha with the new programmatic ad channel. So this is something that I think you've worked on in the past with different partners et cetera. Can you just talk about this new Alpha what the strategy is and what the success that you're seeing early on, and any color there?

 

And then the second question on data licensing, can you just talk about within the Gnip business the difference between price increases versus new account growth in terms of driving the overall acceleration there, and do you expect this growth to kind of consistently stay at this level, into 2018 and 2019. Any color there on data licensing would be helpful? Thank you.

 

Anthony Noto - Twitter, Inc.

 

Sure. So let me take your programmatic real-time bidding question. I want to emphasize it's very, very early days for us. It's a test. We've talked about previously from a party standpoint as we think about revenue opportunities and prioritization we've talked about tapping into new channels of demand. One new channel of demand is video and tapping into those budgets outside of digital and social. The second opportunity for incremental demand is third-party demand. We think there's a real opportunity to tap into premium display budgets. We do not really tap into those budgets today. We think our RTB product could be very competitive against premium display, budgets and that's the opportunity that we're seeing in front of us from a demand perspective.

 

On a supply perspective, we have some inventory that's not being sold, we're in a demand constrained environment, not supply constrained environment. So we think we can tap into this third-party demand through programmatic RTB, sell more of our existing inventory in owned and operated. Potentially, I want to emphasize the word in quotes "potentially" tap into monetizing our lived out inventory and syndicated inventory. And so that's the rationale behind the initiative. It's very early, we're testing the pipes and technology. Right now we really haven't even rolled out a real Alpha. We're negotiating a number of partnerships with DSPs and I'm only giving that detail so that you don't expect any real impact from this for the foreseeable future because that's how early it is.

 

But we do think it's a real opportunity and one that's worth investing in. As it relates to your second question, our Data Enterprise Solutions business was one that was acquired over four years ago. It had a specific focus on one use case and we think there's an opportunity to expand outside of that use case, and sell data not just for the ability to understand sentiment analysis and to have Brandwatch types of use cases, but actually use the data to do other things as it relates to delivering the right content to the right user at the right time as it relates to buying media, as it relates to direct marketing.

 

We haven't started to enter into that type of opportunity yet, but that is the biggest opportunity to drive incremental growth of data partners. The bulk of our growth that you're currently seeing is from our existing customers. And in fact we're going to do business with fewer customers instead of more. And the reason why is because we're focused on the channel strategy and a partnership strategy that results in higher prices for the value that we're creating and more products focused to land and expand.

 

And so it's not about driving penetration of more data partners in the current execution today, it's about driving fewer partners and more spend partners so they invest more in the opportunities in front of them. We still think there's a significant opportunity in that strategy, but there's also an opportunity to expand our data partners through broader usage and we're just at the very early stages of that. And that hasn't shown up in the results yet.

[alwaysdrawing]

Another solid quarter.  I still do not see any opportunities as clear to me as TTD, and it remains my largest position.  It's rare to see such growth, profitability, industry wave, and long runway.  The company, and the earnings call, are among the most bullish I have ever seen.  They are a growing market share in a growing market, and Connected TV and programmatic advertising are going to continue to grow fast.

 

The risks are that the walled gardens win and TTD is excluded from large programmatic markets, however CEO Jeff Green believes that in the long term, the walled gardens will open to add additional demand to their platforms.  I view that opportunity as a potential major boost to the business, however I do not think it is necessary for TTD to continue to grow at breathtaking pace.

 

Call transcript:

https://seekingalpha.com/article/4149772-trade-desks-ttd-ceo-jeff-green-q4-2017-results-earnings-call-transcript?part=single

 

Some highlights:

 

In 2017, we surpassed $1.55 billion in total spend, resulting in annual revenues of $308 million, which is an increase of 52% year-over-year.

 

We generated an adjusted EBITDA of $95.5 million for 2017, which reflects an adjusted EBITDA margin of 31%.

 

We have seen these trends develop and we are building on the solid foundation we established in Connected TV over the last two years. When we committed to CTV, we invested in our platform and formed our initial inventory supply partnerships. And then, from Q2 2016 to Q2 2017, our available CTV inventory grew by 1000%, which I stated at the time was the most bullish number we could share about CTV.

 

Then, from Q4 2016 to Q4 2017, CTV spend in The Trade Desk platform increased 535%. In fact, the month of December 2017 over the month of December 2016, the growth rate was even higher at almost 1000%. This is probably the most bullish fact we can share about our performance in 2017.

 

In 2017, international revenues for The Trade Desk grew at just over 2.5 times the 45% rate of North American revenue growth. In Q4, that international revenue growth rate was 3 times that of North America. We also saw especially strong growth in our European markets, where every office in that region increased their business by 100% or more. Our German office grew its business by over 200% in Q4.

 

In 2018, we expect gross spend in our platform to be over $2.1 billion resulting in revenues of at least $403 million.

 

It is land grab time in advertising, so we again believe that price discoverable problematic represents a little more than 2% of the global advertising pie which is growing and will be a $1 trillion in less than 10 years.

 

I don't know that there'll ever be a transition like the one we're experiencing now where transactions are going from inefficient pieces of paper and a handshake deal and martini lunches to digital transactions. And any focus on bottom line, I think would miss out on the opportunity, which is to grab land. So that is our focus.

[alwaysdrawing]

Another good quarter.

 

Earnings Release:

http://investors.thetradedesk.com/phoenix.zhtml?c=254422&p=irol-newsArticle&ID=2348549

 

For the quarter, revenue was $85.7 million, up 61% from a year ago and adjusted EBITDA increased 202% to $18.9 million,” said Founder and CEO of The Trade Desk, Jeff Green.

 

-- Total Mobile (in-app, video, and web) grew 95% from Q12017 to Q12018 and increased to 42% of gross spend for the quarter highlighting the growing scale and importance of this channel to advertisers

-- Mobile Video grew nearly 160% from Q12017 to Q12018

-- Mobile In-App grew nearly 110% from Q12017 to Q12018

-- Connected TV grew over 2,000% from Q12017 to Q12018

-- Audio grew over 650% from Q12017 to Q12018

 

Upwardly revised full year estimates:

 

Full Year 2018

 

Revenue of at least $433 million

Adjusted EBITDA of $133 million or about 30.5% of revenue

[Guest Schwab711]

I like this business a lot but this is new microeconomics for me so I have nothing to add yet. Keep posting though.

[gjangal]

I like this company a lot. Have a small position. Don’t have any more details than op’s post , but i have talked to a few people working in the industry and they have a great opinion on this company.

 

If you want to hear Jeff green talk, there are lots of videos on youtube. Seems like a smart, honest and  thoughtful ceo with a good long term vision

 

Positives :

 

Secular revenue growth

Operating leverage

High recurring revenue.

Possibly high switching costs

 

Negatives:

 

Ad-tech is risky to disruption

Take rate is around 20% , this may damp operating leverage

[LongHaul]

I like this company a lot. Have a small position. Don’t have any more details than op’s post , but i have talked to a few people working in the industry and they have a great opinion on this company.

 

If you want to hear Jeff green talk, there are lots of videos on youtube. Seems like a smart, honest and  thoughtful ceo with a good long term vision

 

Positives :

 

Secular revenue growth

Operating leverage

High recurring revenue.

Possibly high switching costs

 

Negatives:

 

Ad-tech is risky to disruption

Take rate is around 20% , this may damp operating leverage

 

 

What type of operating leverage do you think is the largest factor?

 

What is take rate?

 

Thank You

[gjangal]

Take rate is just a term Jeff Green used in one of his videos. Its a percentage of gross billings or ad dollars flowing through the platform. The way he said it was he couldn't charge the same per seat for big ad agencies in Madison Avenue and some small shop in other parts of the country the same rates per seat, therefore a percentage of gross billings was a better model. It's around 20% now, but he expects it to come down further ( which in his opinion was good for the industry ) as more advertising dollars flows through. It might be compensated on the other side by increasing ad prices. More relevant ad's leads to a better pricing of an ad spot kind of a situation

 

Operating leverage will be the result of mostly fixed costs in a software business. Employee salaries and sales and marketing are the cost variables on recognized revenue. The incremental ad dollar flowing through the platform is more profitable for them. Currently they are investing in building out more features and sales and marketing to go after more clients.

[alwaysdrawing]

Another earnings/revenue beat and raise for TTD in Q3. 

 

Earnings Release:

http://investors.thetradedesk.com/phoenix.zhtml?c=254422&p=irol-newsArticle&ID=2363161

 

Highlights:

Record revenue of $112.3 million was a 54% increase year over year which equaled the 54% year over year increase we had last year in the second quarter. Net income was a record $19.3 million.

 

Second Quarter and Recent Business Highlights Include:

 

Continued Omni-channel Growth: Omni-channel solutions remain a strategic focus for The Trade Desk as the industry continues shifting toward transparency and programmatic buying.  Specific channel spend highlights include:

 

Mobile (in-app, video and web) grew 89% from Q2 2017 to Q2 2018.

Mobile increased to 45% of gross spend for the quarter, its highest percentage ever, highlighting the growing importance of this channel to advertisers.

Connected TV more than doubled from Q1 2018 to Q2 2018.

Audio grew 191% from Q2 2017 to Q2 2018.

Mobile video grew 156% from Q2 2017 to Q2 2018.

Mobile in-app grew 104% from Q2 2017 to Q2 2018.

 

Projections:

 

Third Quarter 2018:

Revenue of $116 million

Adjusted EBITDA of $33 million

 

Full Year 2018

Revenue at least $456 million, revised from $433 million

Adjusted EBITDA of $140 million, revised from $133 million

[Carvel46]

alwaysdrawing, thanks for posting on Trade Desk!

 

Curious how you see existing and developing moat for Trade Desk?

 

Interesting discussion of consumer surplus on 2q18 call.

 

 

[alwaysdrawing]

alwaysdrawing, thanks for posting on Trade Desk!

 

Curious how you see existing and developing moat for Trade Desk?

 

Interesting discussion of consumer surplus on 2q18 call.

 

 

The Trade Desk is the best independent DSP, and is positioned for very strong growth alongside the transition to connected TV.  In this type of market, I see only a handful of winners, and TTD is well positioned to be one of them.  Similar to other tech companies, whoever is the best can reap the rewards of the industry (e.g. Google in search, Facebook as a social network, Amazon for e-commerce) as the factors that drive their growth benefit the industry leader more than any competitors because they have better data and more resources. 

 

The point of "consumer surplus" on the phone is a good one:  The Trade Desk isn't like most ad tech, just out to squeeze a dollar from the system.  They design their platform so that every dollar of revenue generates MORE than that amount of value for the users of their platform.  That extra value is their moat--as long as they provide more than $1 worth of value for each dollar of spend on their tools, they will continue to gain more business.  That in turn spins the flywheel of them generating more spend, improving their data (to be better than competitors), and continuing to invest in more tools to put them further ahead.  As Jeff Green said on the call, they aren't trying to take profits at this point, and they are focusing on growing and improving their value proposition.

 

Generally, I think the major risk to TTD is Amazon.  Amazon advertising is the fastest growing part of their business, and I suspect that the Amazon AWS model would be a good one to layer a "tax" on the connected TV or general advertising market.  The walled gardens (Google/YouTube, Facebook, Snapchat, etc) are possible threats, however their conflict of interest inherent in controlling both the ad inventory and the ad marketplace ultimately may face pushback from brands over time, as the data to analyze performance is all kept in house. 

 

TTD's CEO Jeff Green thinks long term the walls come down on the walled gardens.  I'm not so sure for the majors (Google/Facebook/Amazon), however, TTD is growing very quickly without the walled gardens, and if they do open up, there could be a lollapalooza effect.  Riding the industry wave towards connected TV feels like Buffett and ABC/Capital Cities a generation ago.  The writing is on the wall here, and I think The Trade Desk is positioned to do very, very well going forward.

 

To anyone looking at TTD for the first time, I suggest reading previous earnings call transcripts--they are extremely helpful in understanding the business and navigating the landscape of ad tech.  It's also unmistakable how big Jeff Green and the Trade Desk team feels that this is a big opportunity.  I agree.

[alwaysdrawing]

Some discussion that’s helpful for understanding TTD’s business, and the role is DSPs within AdTech tech in Barron’s.

 

https://www.barrons.com/articles/ad-tech-firm-poised-to-surge-50-1534348513

[Gregmal]

https://seekingalpha.com/news/3407602-trade-desk-beats-0_15-beats-revenue

 

Earnings looked great, yet stock now off $50+ from highs about 6 weeks ago. Just started a small swing position after hours. Would think if there is a bounce candidate, it would be here. This business has a lot going for it, although fundamentally it's incredibly expensive. Looking for a few bucks and then I'll probably be out.

[Gregmal]

Out. Too easy

[alwaysdrawing]

Another quality quarter, with another beat/raise guidance.  Not good enough for the analysts--after hours the stock traded down to $105-108.

 

The conference call revealed that the company continues to be bullish going into 2019, and views connected TV as a once in a generation opportunity.

 

https://seekingalpha.com/article/4220235-trade-desks-ttd-ceo-jeff-green-q3-2018-results-earnings-call-transcript?part=single

 

Some quotes from the call (although the full transcript is worth reading, as it addresses TTD's strategy in Asia, GDPR, Connected TV, Amazon, AppNexus/ATT, etc):

 

The largest part of the $700 billion worldwide advertising market is TV estimated at $230 billion according to IDC. But when TV spend is reallocated to web, video, social video, mobile video, and CTV, video content will approach about half of the growing global advertising pot.

 

While TV has moved to digital, is still in its very early days. We are witnessing a generational shift with a global convergence of the Internet and TV. Within the next 10 years linear TV as we know it today, will be dead. Technology such as 5G are expected to start rolling out in China, Japan and the U.S. very soon.

 

you may recall that in Q1, I said the most bullish thing I'm reporting in this report is that inventory for Connected TV went up by a 1000%, went up by 10x. And then the next quarter, I said the most bullish thing that we've said year-to-date, even more bullish than the thing I said last quarter is that our Connected TV spend went up by 1000%. And when I said that, I never anticipated that when we are giving our Q3 results as we just said, that I would once again say that Connected TV spend went up by 10x quarter-over-quarter Q3 2018 over Q3 2017.

 

Still a long runway here IMO.

[Gregmal]

Monster

 

https://seekingalpha.com/pr/17420514-trade-desk-reports-fourth-quarter-fiscal-year-2018-financial-results

[gurpaul88]

Monster

 

https://seekingalpha.com/pr/17420514-trade-desk-reports-fourth-quarter-fiscal-year-2018-financial-results

 

+1.

[alwaysdrawing]

Another solid quarter, as the Trade Desk continues to perform well, and ride the wave of the movement to programmatic advertising and Connected TV.  There is still a long runway--Connected TV is just getting started.

 

For anyone new to the company, the earnings call transcripts are very helpful in understanding the business, as Jeff Green really wants to communicate how the business works, and what he's trying to accomplish. 

 

https://seekingalpha.com/article/4243202-trade-desk-inc-ttd-ceo-jeffrey-green-q4-2018-results-earnings-call-transcript?part=single

 

Jeff Green designed the business to work as a partner of advertisers with their fees below the consumer surplus they are providing. That's one reason the company has seen such wide adoption, especially compared to other ad tech, where taking as big of a profit as possible makes it difficult to scale, and doesn't help forge lasting relationships with clients.  Similar to Amazon, the Trade Desk leaves some margin on the table in order to grow and capture goodwill. 

 

Their AI tools and data add-ons are also both A) powerful drivers of consumer surplus and value to advertisers, and B) a benefit of being the top dog DSP, where their platform can be more powerful than smaller competitors because their data is better, and costs can be spread over a wider base.

 

 

[glorysk87]

Very fond of the company, but assuming take rate declines a few points over the next few years, how is there any upside left in this name from here? Assuming gross spend declines to a steady 30%ish growth rate, take rates come down a couple hundred basis points, and EBITDA margins in the low 30's, the company is priced at around 20x 2022 EBITDA. Unless the company performs materially better on at least one of those items, it's hard to imagine there's much juice left in the stock from here. If I'm thinking about it the wrong way I would appreciate any pushback.

[gjangal]

My thesis is that there is a long runway for programmatic ad growth, rate of decline of take rate will be much smaller than the rev growth . Plus it’s also a inflation hedge, advertising  over time with increasing ad/marketing spend The risk is that they have to be the a platform

of choice, there will be many ad tech companies but they have to be relevant in the market

[glorysk87]

My thesis is that there is a long runway for programmatic ad growth, rate of decline of take rate will be much smaller than the rev growth . Plus it’s also a inflation hedge, advertising  over time with increasing ad/marketing spend The risk is that they have to be the a platform

of choice, there will be many ad tech companies but they have to be relevant in the market

 

Yea, I understand all of that and agree with that. That doesn't address the question of valuation though.

[gjangal]

I agree it maybe expensive in the short run. They are also investing in building out capabilities in the platform. IMO when there is a long runway with volume growth and a good operator owner, valuations take a backseat in the short term. I know it’s not the answer you are looking for but sometimes price moves first, value is reflected later

[glorysk87]

I agree it maybe expensive in the short run. They are also investing in building out capabilities in the platform. IMO when there is a long runway with volume growth and a good operator owner, valuations take a backseat in the short term. I know it’s not the answer you are looking for but sometimes price moves first, value is reflected later

 

I'm not saying it's expensive in the short-run. I'm saying it's expensive on an absolute basis and in the long-run. 3 years out assuming they don't fall victim to any of the numerous risks, to earn a 10% annual return on the name, you need it to trade to ~$255. That would put it at around 25x EBITDA in 2022, growing at around half the rate it grows now, with many of the same risks remaining. So what's a fair multiple for a company growing at a slowing 25% annually? I wouldn't say 25x EBITDA. Google grows at a comparable rate and trades at 11x, while being an arguably much higher-quality and lower-risk company.

 

Not sure why "valuation takes a back seat" when it's arguably the largest driver of expected future returns from here.

[gjangal]

It is expensive, let’s get that out of the way. I am not debating it. Let’s say i sold it for valuation purposes and didn’t deploy money elsewhere because i couldn't find any other opportunities or i have excess cash every year to deploy, what would be a suitable entry point again?  Am i not timing the market on a long term opportunity? My view is for long term opportunities, it’s better to hold and evaluate periodically if the main thesis is broken or not. If it’s broken, sell it, if not why disturb compounding

 

[alwaysdrawing]

I have reduced my exposure here, as the valuation has leapt ahead, especially since I posted this thread in October 2017 when the share price was ~$65. 

 

I agree with glorysk87, it's much harder to justify the current share price using "conservative" growth prospects.  That said, I think growth could very well be much more significant than people expect, as programmatic advertising generally and connected TV specifically have a very long runway for growth that very likely will sustain higher than 25% annualized growth for the next 5 years.

 

When I look at a business like this, the real questions are:

1. Will TTD be the eventual winner in the programmatic advertising DSP market

2. If they win, how big is the market and what do the economics look like?

 

I expect that take rates will be relatively sustainable, and at this point, it looks like TTD is likely to win, as they are independent (rather than ad sellers like Amazon, Google, Facebook, etc) and as the current leader, their economics and data will be better and improve faster than competitors.  Google in the early days is a helpful comparison--they weren't the only search engine, but their acceptance and popularity helped propel them into continually improving their software and staying in the lead. 

 

How much can new competitors pour into AI technology like Koa, and compare that to TTD?  The biggest threat to TTD is the walled gardens:  Facebook, Google/YouTube, Amazon, and whether those companies end up controlling connected TV or if Roku and more open supply side platforms win.  That said, advertisers are also wary of giving those walled gardens too much power, as they would possibly control ad supply and the DSP platform.  That's not insurmountable--Facebook for example controls their entire ad market, but it seems to me that a third party independent like TTD is likely to remain a significant player and grow with the industry.

 

The bottom line is, how big is the wave of connected TV and programmatic advertising, and does TTD win?  My personal guess is that the end state of programmatic TV is very, very large, and it remains to be seen who wins, but if it's TTD, I'd expect the company to be much larger and a much more valuable stock than today. 

 

I'll also say that I'm very hesitant to place significant odds or values on what the future looks like here, but it's certainly true that there is more risk at $200 than there was at $65.  It's also worth noting that SAAS companies have rocketed higher in the last couple months after getting killed in Q4 2018.  If the general macro climate deteriorates, I'd expect TTD and all of the SAAS companies to decline more than the general market, which could provide buying opportunities at lower prices.  If you look at Q3 2018/Q4 2018 results, and expectations, and the stock price over the same timeframe, it's easy to see that the stock can move much more than changes in the underlying business.