The Trade Desk Inc.
Simply put, The Trade Desk brings a whole new level of intelligence and efficiency to digital advertising. I have been skeptical of investment ideas based on online advertising for various reasons such as click fraud, privacy, inaccuracy or inefficiency, and this one addresses pretty much all of my concerns. Trade Desk enables advertising agencies to programmatically (through automation) buy advertising space based on their specified criteria/factors and to better evaluate their advertising campaigns across various types of media or platforms (mobile, connected TV, apps, websites, media players). Trade Desk is the leader in programmatic advertising category having doubled the category’s growth for 5 consecutive years. The programmatic advertising category is estimated to be a fast growing $33 billion segment of the much larger $720 billion advertising industry. Their platform is data driven for better audience identification and matching of campaigns to improve the effectiveness and therefore value of those campaigns. Advertisers can pay more for space they value, pay less for space they don’t value, and refrain from bidding for space that does not fit their campaigns. Do you often see advertisements for products you searched for and then purchased but still continue to see the ads? Or do you see ads that are completely irrelevant to you? Trade Desk seeks to improve such flaws, improving effectiveness and cost for the advertiser.
Media buying increasingly going digital, increasing audience fragmentation, as Television evolves from linear TV to connected TV, its audience will be able to be segmented which could significantly change how TV advertising inventory is monetized. This digitization is more than just a shift from analog to digital, it’s also an increase of complexity that begs for automation and improvements/intelligence. Trade Desk enables fast, accurate, and cost-effective decision making for advertisers. For refence, Television advertising is estimated at ~$230 billion of the total $720 billion but mgmt. thinks it’s shifting to Connected TV and video faster than most people anticipated. “Probably the fastest growing segment of CTV inventory is coming from large networks such as NBC, FOX, CBS, ABC, discovery, ESPN, A&E, it’s on news channels, sites or players where these large networks and content owners are going direct to consumer”. Inventory also coming from ad-funded channels like Hulu, Live events for CTV, mobile apps, video players (NFL playoffs including Super Bowl, World Cup, NBA playoffs, World Series)
By their focus on buyers of advertising space, they build relationships and trust with their advertising agency clients to drive repeat and growing business. Clients can customize their experience by building proprietary features and interfaces in TTD’s platform rather than providing a cookie-cutter approach. The market is competitive and highly fragmented with competitors ranging from small private companies to divisions of large companies including AT&T, Adobe, and Google although TTD believes they compete on performance, capabilities, and transparency. Google is an interesting animal in that they are both a supplier of advertising space and a competitor as Google places ads based on their search algorithms. Given TTD’s focus on buyers only, they view the building of trust as very important for future success and as such I would not expect management to eventually sell to a party who plays both sides of the field, I think Adobe would be a much better candidate. Trade Desk states they have important and complex relationships with Google, Facebook, and Amazon. Given Facebook’s recent issues, this raised my eyebrows however TTD asserts the Cambridge Analytica issue for Facebook is not relevant to TTD as Cambridge Analytica was not bringing in third party data into the platform but trying to take data out of the system and use that data in non-permitted ways. As for the spread of political misinformation, TTD says political spend on their platform is low although it’s possible the fallout from these issues could be further reaching. Digital advertising relies on cookies or other identifiers which raises privacy concerns but also raises questions on the effectiveness of digital advertising without cookies. Media buying is increasingly going digital rather than going away which increases complexity that begs for automation and a solution to privacy/effectiveness issues. Trade Desk developed a Unified ID to standardize the identification of anonymous users as individual identity data is not included in the data on their platform. This initiative appears to be gaining traction and adoption by other participants. The company also views the international market as a significant opportunity as International is roughly 14% of their business vs 66% of the global industry. As for concerns on GDPR in Europe, Trade Desk worked with customers to adapt to and be compliant in a GDPR world so I view the emphasis of privacy rights is actually a strength for the company.
Trade Desk is also working to expand into Asia and has announced relationships with Baidu, Alibaba, and Tencent and even more recently announced the availability of their platform in China. The company expects growth in China to take time as they have to physically recreate their infrastructure in China. Insiders own about 15-17% of the company although they control >60% of the voting power.
For those who dig into the company’s financials, the company discloses Gross Spend and Gross Billings on their platform but their reported Revenues are net of the cost of advertising space. Accounts Receivable is on the same basis as Gross Billings so they look outsized compared to Revenues. While the company is profitable and self-funding, it’s not a cheap stock at ~60X trailing earnings although I think their future opportunity dwarfs their current $8 billion market cap. The stock can be very volatile, it was down 30% in the December 2018 selloff and was recently hit around 12% on talk of Google restricting cookies on Chrome browsers.
Ests: 1Q20 2Q20 FY20 FY21
Revs 158.3 175.7 771m 998.5m
EPS .42 0.68 3.08 4.13
P=250.01, Cash/Share=6.27, excess non-cash NWC 5.88/sh, TTM EPS=3.69, P/E=68X
1Q20 .61 vs .49 +24% w 11% TR instead of refund, est .42
May 7, 2020, P=322.50, TTM EPS=3.81, P/E=85X
Revs +33% to 160.7m, adj EBITDA margin 24% vs 20%, EBITDA +57.9% to 39m
Mobile +38%, Mobile Video +74%, Mobile in-app +55%, CTV +100%, audio +60%
Shift in advertising 9 weeks ago, “nowhere is it more apparent than in CTV”, CEO thinks data-driven advertising will accelerate
Jan and Feb were ahead of their projections then saw most advertisers indiscriminately cut budgets, quicker to adjust than for example linear TV spend. Decline stabilized in mid-April and has recently started to recover. Expects recovery spend to look very different than before the pandemic, cuts indiscriminate but spending return will be very deliberate, offensive spend. Thinks linear TV’s decline accelerates, CTV to benefit significantly, significantly due to sports being cancelled (expect linear tv ad spend to fall 41% in March and April, significantly weak “upfront” budgets, changing the landscape and unshackling advertisers), advertisers in a better position to be more data-driven,. Thinks CTV reach will exceed linear TV in 2020.
Late April seen improvement to negative high teens, driven primarily by CTV, mgmt. repeatedly highlights lack of visibility.
March declines sound like they were larger, and recovery lower, than at the walled gardens due to how walled gardens control the whole ecosystem and can do performance advertising to retain spend where TTD doesn’t do performance spend
Withdrew FY20 guidance, not providing 2Q guidance.
4Q19 1.49 vs 1.09 +37%, est 1.17 up from 1.11, FY19 EPS +37% to 3.69
Feb 27, 2019, P=250.01, TTM EPS=3.69, P/E=68X, FY20 P/E=66X
Revs +35% to 215.9m, adj EBITDA margin 39% vs 42%, EBITDA +24% to 83.5m
4Q19 Gross Billings +36.6% to 1.0bn, FY19 Gross Spend +33% to 3.1bn, 89% of 4Q Gross spend was from existing customers
Video +54%, CTV +100%
1Q20 Guidance: Revs +40% to 169m (est 161.2m), adj EBITDA +42% to 35m
FY20 Guidance: gross spend >+37% to >4.24bn, Revs >30.5% to >863m, est 860m, adj EBITDA +21% to 259m
Mgmt discussed cookies (between Google and Apple) and despite change at Apple to eliminate 3rd party cookies, TTD is growing faster on Safari.
Very solid results, valuation still looks high but long-term opportunity is compelling and much greater than current market cap.
Sounds like mgmt. is being conservative on FY Rev guidance (especially as they haven’t forecasted material revs in China) and this is the first time they initially guided to 30% EBITDA margins. Take rate looks to be coming down a bit in guidance but mgmt. indicated this is for faster land grab.
2Q19 .95 vs .60, +58%, est .69
Aug 8, 2019, P=273.67, TTM EPS 3.12, P/E=88X,
Revs +42% to to 159.9m, EBITDA margin 36% vs 33%, EBITDA +57% to 58m
Gross Billings +36% to 749.8m, (US +38.5%, International +24.6%), ~89% of gross spend came form existing customers, consistent with past quarters.
Mobile 47% of gross spend, Mobile video +50%, mobile in-app spend +63%, data spend +50%, CTV spend >2.5X, Audio >270%,
Recently added to Amazon Publisher Services to bring programmatic advertising to their 3rdparty premium TV content providers, “one of our most important initiatives in CTV to date”
Mgmt feels momentum for adopting Unified ID continues
Signed 55 new MSAs representing some of the largest brands, highest number of new MSAs in a quarter since 2016. Now over 60% of Fortune 500 using TTD. Hershey has gone from several partners to just TTD.
Guidance: 3Q Revs +37% to 163m (est 162m), adj EBITDA +23% to 45m, EBITDA margin 27.6% vs 31% due to investments made late in 2Q and in 3Q, EPS estimate is .64 vs .65 last year.
FY19 Revs at least 653m (previously >645m), adj EBITDA 201m (previously 188.5m), EBITDA margin 31.8%
Excellent results, crushed EPS estimates, stock has been strong. Stock weak after hours following a solid day, investors might be focusing on EBITDA guidance for 3Q
1Q19 .41vs .34 +21%, est .25
May 9, 2019, P=222.11, TTM EPS=2.77, P/E=80X
Reported adj EPS .49 vs .34 but includes negative tax rate, 8% tax rate would be .41 vs .34
Revs +41% to 121m, EBITDA +30% to 24.7m as company spends for growth.
Gross Billings +37% to 556.4m (US + 38.7%, International +28%, US 85% of total)
~89% of gross spend from existing customers on their platform for at least 1 year (similar to the past year)
Mobile was 45% of gross spend, Mobile Video and In-App grew +60%, Data spend +80%
Connected TV grew >3X, Audio grew >270%
Guidance: 2Q19 Revs 154m (est 154m), EBITDA 46m
FY19 revs raised to at least $645m and adj EBITDA $188.5m (both up slightly from previous guidance)
Stock getting hammered on a weak day as trade tensions flare up again.
4Q18 1.09 vs .54, +102%, FY18 EPS 2.70 vs 1.60. +69%
4Q18 Revs +56% to 160.5m, ~90% of gross spend came from existing customers who have been on their platform for >1 year. EBITDA margin 42% vs 38%, EBITDA +70% to 67.1m
FY18 Revs +55% to 477.3m, EBITDA margin 33% vs 31%, EBITDA +67% to 159.4m
FY18 +55% vs 22% growth for entire programmatic advertising according to Magna Global (more than 2X industry growth for 5 consecutive years).
Increased CTV inventory by 6X since start of the year, CTV spend increased >9X y/y, contributed to revenue acceleration in 4Q18 as >160 advertisers spent >$100k each on CTV with a double digit number of them spending >$1m (>$25m?).
Mobile spend grew almost 80% and now accounts for 45% of total spend on their platform.
55% of Ad Age’s top 200 worldwide advertisers contributed to more than $1bn of spending on TTD platform in 2018. 4 of these top 200 increased their spend >100%, 84 of them increased spending >50%
Unified ID initiative – reduces inefficiencies for advertisers and provides better experience for users, does not attach user’s identifiable information – gaining traction.
Next Wave daily usage accelerated. Next Wave makes it easier for advertisers to layer on data which improves decision making. Almost 40% of their engineering resources for almost 2 years was to build and launch Next Wave. Since they started building Next Wave, they increased their engineering capacity 4X and now they are allocating that capacity to other high-growth opportunities (rather than cutting costs)
1Q19 Expect Revs $116m (+35%), EBITDA 18.3m (vs 18.9) due opex deleverage in seasonally slower quarter. For reference, in 4Q17, 1Q18 Guidance was Revs 73m and EBITDA 7.5m (came in at 86m and 18.9m)
FY19 Expect gross spend >$3.2bn (>+36%) resulting in revs of at least 637m (>+33%), EBITDA margin ~29%. At 4Q17, FY18 Guidance was Gross Spend 2.1bn, Revs +30% to 403m, EBITDA +23% to 117m, (Came in at Revs +55% to 477m, EBITDA +67% to 159m)