TTD - The Trade Desk

[Liberty]

People ignore investments through the income statement too often, focusing on capex, when most of the value comes from the IP and employees. They're hiring quickly, building out new things like CTV and audio that could someday be huge, they're expanding internationally, building new offices there, investing in partnerships with lots of huge companies (more software and infrastructure to build for them), etc. A lot of these costs are upfront and the returns will be later.

 

I didn't even mention capex. I'm only saying that TTD is growing roughly as fast as their markets. Their competition is likely increasing their market share advantage. I really like how well-run TTD is, but I think being the largest pure play leads to TTD being overvalued. TubeMogul is bigger and arguably has better tech to scale.

 

I would definitely pay a premium to the market to own TTD. I'm a huge fan of Jeff Green. I would caution though that I don't think there's any evidence to support that these "income statement investments" are actually happening or high return if they are.

 

What do you mean there's no evidence? They're building the products, improving existing products, building the offices, increasing headcount, and growing quite nicely at very high margins. Their dev velocity is pretty high compared to most companies that I look at. Any time you're looking at a company that isn't mature and building new things, you have to rely on your judgement to know if they're making good investments; if you wait for it all to be reflected in the numbers, that's fine, but by then it'll be mature and a very different company. There's nothing special about one rotation of earth around the sun, nothing says that expenses paid today have to paid off before then. A lot of it is also about building confidence through due diligence that you can trust management to make good, value-creating decisions and to be able to navigate unforeseen troubles. That's why the best management teams are often undervalued even when they look really overvalued compared to their competitors; they keep finding ways of increasing the TAM and of creating new products that weren't even on the map when you made your initial investment and that competitors aren't good enough to have come up with, and they avoid huge mistakes that their competitors fall into...

 

Their pure play nature also has benefits in that their independence puts them in a favored position for a lot of big advertisers to trust them more and share proprietary data with them, which helps improve ROIs on spend. Their incentives are aligned with their customers, and they're not competing with them or conflicted because they own media or an agency or whatever.

[Liberty]

I think Jeff Green is a great businessman, and clearly has created a wonderful company making good returns.  At the current price of 30x revenues, the risk profile is totally different than when I was an investor.  I started this thread and made good money on TTD from around $29/share > $200/share.  Since then I've been on the sidelines. 

 

My guess is the company will do well, but I have a hard time seeing how investors outperform here in TTD (or SAAS generally).  As a general rule, I like to think about what the cash flows would look like as a private business, and it's really hard for me to imagine getting an adequate return paying 30x revenues. 

 

What's the bull case?  They double revenues and double the multiple to 60x revenues and you make 4x in a couple years?  I suppose it's possible.  It's at least possible that Facebook, Google, and Amazon will face anti-trust scrutiny and (lots) more business goes through TTD.

Seems like one of those trading sardines vs. eating sardines situations, where the bull case is primarily that people will pay higher prices for the stock, vs. a likelihood the company generates more cash.  In any case, I don't think I personally have any edge in betting on winners of an unannounced antitrust suit.

 

My best guess is buying SAAS today is like buying Microsoft or Cisco in 2000.  Clearly those were strong, profitable, growing companies.  Investors still lost a bundle that took a very long time to recover, even though fundamentally the company was still strong, profitable and growing for a long time.

 

When interest rates are basically zero, long-duration assets like hyper-growth companies can get pretty crazy valuations. Not sure what's to be done about that, but I do know that no high-performing company never gets optically expensive, and that those who think they're going to dance in and out usually tend to stay out and watch them run away from them... There's pitfalls in investing in beaten down companies, and there's different pittfalls in investing into high-quality, high-growth companies. Nothing's easy or obvious...

[alwaysdrawing]

I think Jeff Green is a great businessman, and clearly has created a wonderful company making good returns.  At the current price of 30x revenues, the risk profile is totally different than when I was an investor.  I started this thread and made good money on TTD from around $29/share > $200/share.  Since then I've been on the sidelines. 

 

My guess is the company will do well, but I have a hard time seeing how investors outperform here in TTD (or SAAS generally).  As a general rule, I like to think about what the cash flows would look like as a private business, and it's really hard for me to imagine getting an adequate return paying 30x revenues. 

 

What's the bull case?  They double revenues and double the multiple to 60x revenues and you make 4x in a couple years?  I suppose it's possible.  It's at least possible that Facebook, Google, and Amazon will face anti-trust scrutiny and (lots) more business goes through TTD.

Seems like one of those trading sardines vs. eating sardines situations, where the bull case is primarily that people will pay higher prices for the stock, vs. a likelihood the company generates more cash.  In any case, I don't think I personally have any edge in betting on winners of an unannounced antitrust suit.

 

My best guess is buying SAAS today is like buying Microsoft or Cisco in 2000.  Clearly those were strong, profitable, growing companies.  Investors still lost a bundle that took a very long time to recover, even though fundamentally the company was still strong, profitable and growing for a long time.

 

When interest rates are basically zero, long-duration assets like hyper-growth companies can get pretty crazy valuations. Not sure what's to be done about that, but I do know that no high-performing company never gets expensive, and that those who think they're going to dance in and out usually tend to stay out and watch them run away from them... There's pitfalls in investing in beaten down companies, and there's different pittfalls in investing into high-quality, high-growth companies. Nothing's easy or obvious...

 

FWIW, I agree with your comment above that TTD is investing and building out resources to expand their business, which is a high margin business that is still growing at impressive rates.

 

TTD was never "cheap", but everything depends on what the business ends up looking like in 5 years.  I don't regret jumping off when I did--the risk profile wasn't what I was interested in anymore.  I also don't really like beaten down companies.  Investing is hard. 

 

My only question is there any price that you think would be "too high" to pay for TTD?

 

I am also concerned that insiders are selling quite a bit.

[Liberty]

FWIW, I agree with your comment above that TTD is investing and building out resources to expand their business, which is a high margin business that is still growing at impressive rates.

 

TTD was never "cheap", but everything depends on what the business ends up looking like in 5 years.  I don't regret jumping off when I did--the risk profile wasn't what I was interested in anymore.  I also don't really like beaten down companies.  Investing is hard. 

 

My only question is there any price that you think would be "too high" to pay for TTD?

 

I am also concerned that insiders are selling quite a bit.

 

Sure, there's definitely such thing as too expensive. But it depends on your hurdle, your opportunity set/cost, and all kinds of things. It's not an "objective price" that is the same for everyone and set in stone.

 

I think COVID has pulled forward a lot of the world's digital transition and programmatic advertising will probably benefit (even if it could also be hurt in the short term, as advertisers have trouble... though they'll also want to move their spend to higher ROI and more trackable places.. pull and push).  I also think it makes a difference that the 10Y was at 3% a couple years ago and is now at 0.6%. If you invert it as a P/E equivalent, that's like going from 33x to 166x.. So a lot of long-duration assets are floating way up, both because of the lower discount rate and because of the COVID digital wave... Very hard to know how things will shake out any time soon, but the future always is uncertain.

[Guest Schwab711]

I also think it makes a difference that the 10Y was at 3% a couple years ago and is now at 0.6%. If you invert it as a P/E equivalent, that's like going from 33x to 166x.. So a lot of long-duration assets are floating way up, both because of the lower discount rate and because of the COVID digital wave... Very hard to know how things will shake out any time soon, but the future always is uncertain.

 

I think this is flawed logic, though I see it more and more. The 10Y UST with a 0.6% coupon guarantees you will receive your principal back. The equity security that relies on disrupting an industry does not. It is unknown if it will exist, how big it would be, how much it would trade for, and so on. Comparing equity security multiples to a UST makes me more and more hesitant to consider the fastest growing companies. It's mania.

 

I'm not saying you shouldn't pay up for quality, but to equate a minority interest in the equity securities of a quality company with the debt of the United States is irrational exuberance.

[Guest Schwab711]

People ignore investments through the income statement too often, focusing on capex, when most of the value comes from the IP and employees. They're hiring quickly, building out new things like CTV and audio that could someday be huge, they're expanding internationally, building new offices there, investing in partnerships with lots of huge companies (more software and infrastructure to build for them), etc. A lot of these costs are upfront and the returns will be later.

 

I didn't even mention capex. I'm only saying that TTD is growing roughly as fast as their markets. Their competition is likely increasing their market share advantage. I really like how well-run TTD is, but I think being the largest pure play leads to TTD being overvalued. TubeMogul is bigger and arguably has better tech to scale.

 

I would definitely pay a premium to the market to own TTD. I'm a huge fan of Jeff Green. I would caution though that I don't think there's any evidence to support that these "income statement investments" are actually happening or high return if they are.

 

What do you mean there's no evidence? They're building the products, improving existing products, building the offices, increasing headcount, and growing quite nicely at very high margins. Their dev velocity is pretty high compared to most companies that I look at. Any time you're looking at a company that isn't mature and building new things, you have to rely on your judgement to know if they're making good investments; if you wait for it all to be reflected in the numbers, that's fine, but by then it'll be mature and a very different company. There's nothing special about one rotation of earth around the sun, nothing says that expenses paid today have to paid off before then. A lot of it is also about building confidence through due diligence that you can trust management to make good, value-creating decisions and to be able to navigate unforeseen troubles. That's why the best management teams are often undervalued even when they look really overvalued compared to their competitors; they keep finding ways of increasing the TAM and of creating new products that weren't even on the map when you made your initial investment and that competitors aren't good enough to have come up with, and they avoid huge mistakes that their competitors fall into...

 

Their pure play nature also has benefits in that their independence puts them in a favored position for a lot of big advertisers to trust them more and share proprietary data with them, which helps improve ROIs on spend. Their incentives are aligned with their customers, and they're not competing with them or conflicted because they own media or an agency or whatever.

 

Even though I think many of the things are probably reasonable, you can't point to anything that supports the things you are saying. Every fast growing tech company is building new products, it doesn't mean they will earn high returns on capital. Show me numerically why you think they are earning high returns. If you add back all R&D expense, they still don't have great ROIC. Normalize margins, the returns still aren't great. To earn high margins, TTD needs more working capital. That's the trade-off in the industry. That's the issue with associating TTD with high ROIC. The investment thesis for TTD should be that they can reinvest all earnings at LDD ROIC for 30 years. That's worth something. But how sure are you that TTD will earn LDD ROIC in a competitive industry with MSD WACC for 30 years? The actual returns and growth trends suggest TTD should be trading at 40x earnings or so.

[mwtorock]

I also think it makes a difference that the 10Y was at 3% a couple years ago and is now at 0.6%. If you invert it as a P/E equivalent, that's like going from 33x to 166x.. So a lot of long-duration assets are floating way up, both because of the lower discount rate and because of the COVID digital wave... Very hard to know how things will shake out any time soon, but the future always is uncertain.

 

I think this is flawed logic, though I see it more and more. The 10Y UST with a 0.6% coupon guarantees you will receive your principal back. The equity security that relies on disrupting an industry does not. It is unknown if it will exist, how big it would be, how much it would trade for, and so on. Comparing equity security multiples to a UST makes me more and more hesitant to consider the fastest growing companies. It's mania.

 

I'm not saying you shouldn't pay up for quality, but to equate a minority interest in the equity securities of a quality company with the debt of the United States is irrational exuberance.

 

Not that I know anything about TTD, but big 5 advertising agencies are trading at 10 P/E due to expected marketing spending cuts. OMC's market cap is close to TTD now...

[Liberty]

I also think it makes a difference that the 10Y was at 3% a couple years ago and is now at 0.6%. If you invert it as a P/E equivalent, that's like going from 33x to 166x.. So a lot of long-duration assets are floating way up, both because of the lower discount rate and because of the COVID digital wave... Very hard to know how things will shake out any time soon, but the future always is uncertain.

 

I think this is flawed logic, though I see it more and more. The 10Y UST with a 0.6% coupon guarantees you will receive your principal back. The equity security that relies on disrupting an industry does not. It is unknown if it will exist, how big it would be, how much it would trade for, and so on. Comparing equity security multiples to a UST makes me more and more hesitant to consider the fastest growing companies. It's mania.

 

I'm not saying you shouldn't pay up for quality, but to equate a minority interest in the equity securities of a quality company with the debt of the United States is irrational exuberance.

 

It's not what I'm doing. I'm just saying what Buffett is saying, that interest rates are like gravity for financial assets, not that it's directly equivalent. And right now, with the central banks saying they won't raise them until 2022 or whatever, the prospects of higher rates any time soon seems fairly low, so long-duration assets where most of the value is in the future will be impacted a lot more than short-duration asset, that's how it works.

 

There's a big difference between paying for eyeballs in 1999 and for software companies with 70-90% gross margins with organic growth from 30-80% with almost no capital requirements, recurring revenues with very low churn, net expansion of 110-130%, global distribution from day one, massive TAMs, winner-takes-most industry dynamics, rapid tailwinds of the world transitioning to digital (still only single digits of GDP and early days for cloud vs legacy), etc. TTD doesn't fit all these because it's not quite on the same model as most of the other fast-growing SaaS companies, but to say it's just mania is missing a few important details. These types of companies were just impossible until all the right pieces were in place (the latest one being the hyperscale cloud providers that matured in the past 10 years).

 

"This time is different" is dangerous, but so is "it's always the same".

[Liberty]

Even though I think many of the things are probably reasonable, you can't point to anything that supports the things you are saying. Every fast growing tech company is building new products, it doesn't mean they will earn high returns on capital. Show me numerically why you think they are earning high returns. If you add back all R&D expense, they still don't have great ROIC. Normalize margins, the returns still aren't great. To earn high margins, TTD needs more working capital. That's the trade-off in the industry. That's the issue with associating TTD with high ROIC. The investment thesis for TTD should be that they can reinvest all earnings at LDD ROIC for 30 years. That's worth something. But how sure are you that TTD will earn LDD ROIC in a competitive industry with MSD WACC for 30 years? The actual returns and growth trends suggest TTD should be trading at 40x earnings or so.

 

Look, I'm not going to write up a VIC thesis here just to please you. I'm not even sharing what I think of the company yet, just that I think some of the ways people are thinking about it are flawed in the typical ways that traditional value investors have a hard time thinking about fast-growing companies in their growth/investment phase, which is why people like Einhorn and Watsa have been short most of the best performing stocks of the best 10-15 years and why value investors mostly got out of Microsoft just as it became interesting again in 2014-2015 and CRM was for a long time the value poster boy of a company to short because where were the earnings? (same with AMZN for a long time, NFLX)...

[Broeb22]

 

 

It's not what I'm doing. I'm just saying what Buffett is saying, that interest rates are like gravity for financial assets, not that it's directly equivalent. And right now, with the central banks saying they won't raise them until 2022 or whatever, the prospects of higher rates any time soon seems fairly low, so long-duration assets where most of the value is in the future will be impacted a lot more than short-duration asset, that's how it works.

 

There's a big difference between paying for eyeballs in 1999 and for software companies with 70-90% gross margins with organic growth from 30-80% with almost no capital requirements, recurring revenues with very low churn, net expansion of 110-130%, global distribution from day one, massive TAMs, winner-takes-most industry dynamics, rapid tailwinds of the world transitioning to digital (still only single digits of GDP and early days for cloud vs legacy), etc. TTD doesn't fit all these because it's not quite on the same model as most of the other fast-growing SaaS companies, but to say it's just mania is missing a few important details. These types of companies were just impossible until all the right pieces were in place (the latest one being the hyperscale cloud providers that matured in the past 10 years).

 

"This time is different" is dangerous, but so is "it's always the same".

 

With long-duration assets like TTD, wouldn't long-term expectations for interest rates factor more heavily in pricing these assets than short-term (2022) expectations for interest rates?

 

With yield spreads increasing since troughing in Sept. 2019, it's kind of strange to attribute the increase in TTD's and other growth stocks to interest rate movements. Maybe I'm wrong, but I would think an equity investor should be pricing in significant uncertainty about the magnitude of long-term interest rates. Are we (market participants) really that confident the Fed can keep a lid on rates indefinitely? This exact comment has probably been made every month over the last 20+ years so I will likely be wrong for a while longer, if not forever.

 

 

[Liberty]

With long-duration assets like TTD, wouldn't long-term expectations for interest rates factor more heavily in pricing these assets than short-term (2022) expectations for interest rates?

 

With yield spreads increasing since troughing in Sept. 2019, it's kind of strange to attribute the increase in TTD's and other growth stocks to interest rate movements. Maybe I'm wrong, but I would think an equity investor should be pricing in significant uncertainty about the magnitude of long-term interest rates. Are we (market participants) really that confident the Fed can keep a lid on rates indefinitely? This exact comment has probably been made every month over the last 20+ years so I will likely be wrong for a while longer, if not forever.

 

The expectation of future rate increases has fallen quite a bit with the crisis, along with the absolute levels of the rates. That has to have an impact. There's also a scarcity value, where when it becomes harder to find things that grow, those that do grow will attract more attention.

 

Is it right, is it wrong? I don't know, but it is.

 

Some people may be good at selling in and out of things, at rotating from growth to value and back, etc. Personally, I'm not good at that game, but I'm pretty ok at holding things. If I had sold CSU or AMZN every time people thought it was overvalued, I'd have sold many years ago.