The Trade Desk (“TTD”) – The Investor Weekly Stock Report

Summary

The Trade Desk (“TTD”) operates a self-service software platform that allows ad buyers to purchase and manage advertising campaigns across thousands of different channels.

2020 was a turning point for the industry and the company. Marketers are being more deliberate and data-driven in everything they do. TTD is a demand-side platform provider that will continue to fare well as marketers retool their media strategies in a post-pandemic world to account for new mandates around data.

TTD continues to gain share in the digital ad market. The company is powered by industry-leading software, a great leadership team, and possesses a high growth business model. As the CEO envisions, it is the “default demand-side platform for the internet” and will continue to benefit from the growth of digital advertising and the recovery of many industries as we emerge from the pandemic.

Unified ID 2.0 (UID) will make digital advertising work better via increased transparency and consumer privacy protection. TTD has a leadership position in this new platform.

TTD is NOT overvalued and has the potential to go > 10.0X. The company is a growth company with high operating margins (>30%) and has been profitable since 2013. TTD has a pristine balance sheet and zero long-term debt.

This is a rapidly growing, premium-valued leader and so volatility is to be expected. But TTD is down nearly 50% from a peak and the company continues to display great fundamentals. The company recently had a 26% one-day drop in the wake of its most recent earnings report on May 10, 2021. It’s too good an opportunity to pass up for an excellent company that has seen a large part of its premium evaporate.

Company Overview

Sector: Information Technology
Industry: Application Software
Employees: 1545
Founded 2009
Headquarters: Ventura CA 93001
Website: www.thetradedesk.com

TTD is a technology company that operates a cloud-based platform “enabling buyers to create, manage, and optimize data-driven advertising campaigns.” TTD campaigns cover various formats and channels, including, display, video, audio, in-app, native and social. Clients are ad agencies and companies managing ad campaigns.

Trade Desk uses its software and AI tools to place advertisements in specific campaigns. The ads target certain demographics and interests and are adaptable to an evolving target market. One way this works, for example, is that when an individual browsing the web lands on a page with advertising space, the publisher enters the advertisement onto an exchange, and TTD bids for it on behalf of its client.

TTD is not the only demand-side platform, but it has risen to the top of its industry space for a variety of reasons: (1) TTD has transparent partnerships with agencies, while others have bought up ad inventory and marked up pricing; (2) TTD made smart bets on streaming TV and has a top position in placing higher-value TV ads; and (3) The company has industry-leading AI and software that helps clients maximize advertising spend.

Going forward, TTD will launch Solimar, a complete redesign of its platform. The system is focused on building off-site data into the system, which will allow marketers to better track campaign performance results to in-store sales. This is a powerful way to justify ad spending and a great way to quantify ROI. The new launch will also allow advertisers to compare campaign effectiveness across different channels, for example, Pandora to Spotify to CBS to NBC to Hulu to Disney to ESPN, etc.

Leadership

Jeff Green is the founder and CEO of TTD. Prior to Trade Desk, Green was founder and COO of AdECN, an online advertising exchange acquired by Microsoft in 2007.

Market

A year ago, with the pandemic in full effect, market pundits and analysts posited that across the media landscape, advertising would soon disappear as a result of the economic shutdown. Barron’s said on April 03, 2020: “Across the media landscape, advertising is disappearing, one more casualty of the global economic shutdown. New technology won’t be a savior…”

Total advertising spending in North America contracted in 2020, from $254 billion to $243 billion, a decline of roughly 5%. Cable and satellite service providers lost nearly 8% of their subscribers in 2020 and are expected to continue the trend in 2021.

And while spending plummeted, and budgets were slashed, the economy has since rebounded and advertising spending is no longer in peril. The demise of the industry has been greatly exaggerated. In fact, digital advertising still grew about 12%, which may be a slower pace than recent years, but it’s still an impressive pace. Remember that digital advertising is targeted and measurable, and advertisers feel more confident that they are getting value for their investment. Worldwide advertising is expected to increase 10% in 2021 and US spending on advertising is expected to increase 3%, following a drop of 5% the prior year. Digital advertising in the US is a $400 billion dollar market and TTD is growing faster than its industry. Global advertising is expected to reach $1 trillion in the coming years with more of that becoming digital. Trade Desk finds itself well positioned in a rapidly changing arena. Furthermore, the streaming space is becoming crowded and SVOD providers are not able to achieve profitability by relying on paid subscribers alone, so advertising revenue can serve to fill the gap. And while Netflix, Amazon, and Hulu control roughly 50% of the market, and may not need the additional ad revenue, there’s a wealth of growing OTT providers competing for dollars. This includes HBO Max, Disney+, Apple TV, Peacock, ESPN, Starz, Showtime, Paramount, Youtube, Sling, Britbox and others – this is the AVOD region. Disney for example, which owns Hulu and ESPN, has partnered with TTD and consolidated a variety of CTV ad space to streamline the buying process for advertisers.

More on CTV, OTT, SVOD and AVOD now…

Connected TV (CTV) is the company’s fastest-growing channel. What is Connected TV? It is effectively any type of TV that can stream digital video, whether through a built-in smart tv platform, dedicated streaming service, or game console. A connected device, plugs directly into your TV and is connected to the internet, which enables apps and video streaming to be used on the TV, regardless if the TV itself is a smart TV. Popular examples are Roku, Chromecast, Amazon Fire Stick, Apple TV, and the major gaming consoles. Connected TV advertising allows brands to reach their audience on smart TVs and OTT devices. OTT stands for “over the top.” OTT providers include Netflix, Hulu, Disney+, Peacock and Apple TV. These days most OTT content is viewed via CTV.

You can think of OTT as the method for delivering video content and CTV as the device on which you are watching that content.

The success of the company continues to highlight a successful shift away from Traditional Media. As the amount of content available for CTV continues to grow, and targeting continues to improve, CPM (cost-per-mille, what you pay to reach 1,000 people) will remain high and TTD will benefit from this.

The question investors are seeking to answer is whether the majority of CTV will be subscription video on demand or advertising-based video on demand. Subscription video on demand (SVOD) may lose share to advertising based video on demand (AVOD) in the coming years. There’s some great research by Omdia that shows advertising-based video to be outpacing the former. According to Omdia, there are now more than 200 million active AVOD users in the U.S. alone. By 2024, Omdia predicts that annual CTV advertising revenue will top $120 billion, outperforming subscription revenue by more than 20%. Omdia also predicts that markets such as the U.K. and Germany will be the fastest-growing CTV markets outside of the United States, driven by very similar consumer shifts.

TTD has been investing rather heavily into forming partnerships with key inventory suppliers such as Disney, Fox, Discovery, and ViacomCBS. The company also announced a new partnership with Sky TV via key markets in the UK and EU. Conceptually, broadcasters work with the Trade Desk so that media planners can run program ads on the platform.

The Trade Desk’s Unified ID 2.0, known as UID, may quickly become the replacement for third-party cookies used by Google’s Chrome browser. And it is focused on bridging the gap between Internet usage and consumer privacy. Tracking web browser cookies is an old technology and it was never designed for ad targeting. GOOG is phasing out third-party cookies for its Chrome browser in 2022 and AAPL has already phased it out of its Safari browser.

GOOG is being threatened on a myriad of fronts over privacy issues, so it is looking for alternative ways to target ads. TTD faces off squarely against Google and Facebook, which extensively track and control user data. UID allows companies to access anonymized customer data at any time, filtering their own relevant insights. It provides companies with first-party data, which is the same data that Facebook and Google intentionally keep from them. And UID aims to provide the consumer with full control over what is shared and what is not.

The data goes beyond consumer anonymity and provides a Double Encryption Protocol or DEP based on email addresses. Consumers will be able to give informed consent when they sign into sites and UID will preserve privacy, while offering browsing data to advertisers. TTD has built UID as a common source for matching cookies and it has quickly become the most common digital advertising ID in bid requests.

A variety of ad exchanges, including OpenX and SpotX, have already signed on to work with TTD. As well as a variety of connectivity companies, sell-side platforms, ad-tech companies and publishers such as LiveRamp, PubMatic, Magnite, Criteo and FuboTV. UID has been submitted to the Partnership for Responsible Addressable Media, or PRAM, to promote community development and management.  PRAM consists of the biggest advertising brands, major agencies and ad tech players in the industry.

Green and TTD continue to position UID not as a perfect identity solution to replace cookies, but rather as an opportunity to collaborate with others to address the weaknesses that cookies present. This will allow UID to gain increasing common currency status and become increasingly popular across every Data Management Platform in a data-driven ad market.

International Growth

N. America represents about 87% of the total spend for the company. TTD anticipates continued growth in international markets, specifically APAC and Europe. Trade Desk officially launched in China in 2019, where players like Facebook and Google don’t have a presence. And although BABA and Tencent are strong competitors, the recent Chinese crack down on monopolies, that aren’t state-sponsored, could be a credit positive for The Trade Desk. Blake Grayson, TTD’s CFO, recently remarked, “Our offices in Europe showed particularly encouraging results, as each office grew spend faster year-over-year in Q1 than total company spend. In APAC, Shanghai, Hong Kong and Tokyo spend all more than doubled. It is still early days for us internationally, but we are optimistic on the trends we are seeing at the start of 2021.”

Risks to UID

UID uses an e-mail identifier, which could potentially prove unsustainable if it is unable to scale rapidly enough amongst publishers. Email identifiers could also fall short of consumer expectations for privacy, especially amidst a rapidly expanding regulatory environment. As of today, GOOG has expressed no interest in supporting e-mail-based identifiers or any mechanism that could be viewed to replicate cookies.

Financials and Valuation

TTD is a highly profitable company and stands out amongst its sector peers.

TTD reported Q1 2021 earnings on May 10, 2021. Trade Desk currently has $680 million in cash and short-term investments. TTD has no long-term debt, but has the opportunity to add leverage, which would be supported by ample cashflow.

TTD generates strong operating and free cash flow as indicated in the graph below. TTM Operating Cash Flow was $427 million and Free Cash Flow was $206 million, as of March 2021. For the quarter, Operating Cash Flow was $75 million, up 42% from $53 million in the prior year. Free Cash Flow was equal to $61 million compared to $33.5 million in 2020. That’s an increase of 90% year-over-year. Bears may argue that stock-based compensation, which gets added back as a noncash expense, is artificially driving the value of FCF up. However, the total number of shares outstanding was up less than 3% year-over-year, indicating the strength and materiality of operating cash flow contributing to free cash flow. Remember that FCF is effectively operating cash flow less capital expenditures.

As per earnings results, TTD beat on Revenue and EPS. Q1 2021 Revenue was $219 million, up 36.8% year-over-year, beating estimates by $2.6 million.

Despite strong top-line growth, operating margins came in at 3.5% for the quarter compared to 6.7% year-over-year. This was mainly due to expenses related to stock-based compensations. Stock based compensation was approximately 24% of sales in Q1 2021 as opposed to 14% of sales in Q1 2020. The stock compensation was paid out mainly the result of strong share price appreciation during the second half of 2020. This compensation will moderate from current levels in 2021. One should note that even current levels of stock-based compensation but remain immaterial in terms of potential shareholder dilution.

TTD posted non-GAAP EPS of $1.41, which beat consensus estimated by $0.60 or 74%. GAAP EPS was $0.45, which also beat estimated by $0.18.

Revenue for TTD is expected to exceed $1.1 billion for 2021E. TTD looks primed for 25%+ long-term growth, with the average analyst estimate topping 27%.

Q1 2021 Adjusted EBITDA was $70.5 million and operating margins were equal to 32%.

TTD once again raised guidance estimates and is looking for revenue between $259 and $262 million for Q2 2021.This equates to 87% growth year-over-year. Management has guided to Q2 profit on adjusted EBITDA of $84 million, which will benefit from lower expenses. The second half of the year will comp against stronger results and earnings growth will moderate slightly. This is mainly because the second half of 2020 saw digital ad spend come back rapidly. Q4 2020, in particular, proved to be an incredibly strong quarter due mainly to political spending. With this in mind, growth should still approach 30%. Management did not provide guidance beyond Q2 2021.

The Investor Weekly believes that TTD will continue to accelerate growth in Q1 2022. This is a highly scalable business and its growth prospect makes the current price attractive.

TTD has a strong history of top-line and bottom-line earnings beats. The graphic below shows quarterly revenue surprises for the past 36 months.

TTD is not cheap by any means; Forward Price to Sales is 21.1X and it is unlikely that the stock will trade down to 10X levels where it was in 2018. But it is a far cry from the 60X levels it

reached in December 2020. However, we feel this multiple is justified on the basis of the company’s high quality credit profile, with ~30% EBITDA margin and a gross margin of ~80%.

Remember that Price to Sales is a solid ratio for measuring young high growth companies. It is calculated by taking a company’s market capitalization (the number of shares outstanding multiplied by share price) and dividing by the company’s total sales over the past twelve months.

Enterprise Value for TTD is roughly $28 billion. Remember that TTD has no debt and so this is, effectively, equity value (less cash). EV = Equity + Debt – Cash.

In the table below we expect a five-year growth rate of 25% and a range of P/S multiples of 15X to 20X, during this time period, which conservatively gives a 2025 projected stock price of $971 to $1,295. A higher valuation would be warranted if the identifier system is able to be used across different channels by advertisers, as well as adopted across a wider mobile device ecosystem.

TTD is at a Buy Point

TTD’s stock dropped more than 25% after announcing Q1 2021 earnings and it’s down close to 50% from its 52-week high of $972.80. And this is in light of better-than-expected revenue, earnings and guidance. Year-to-date the stock is off 33% from its highs.

The company also announced a 10-1 stock split, which will create additional retail appetite.  Investors who hold shares in the company as of June 9, 2021, will receive nine additional shares of common stock that will be distributed after the close of trading on June 16. The company will begin trading on a stocksplit-adjusted basis on June 17.

The Investor Weekly carefully toed into the stock at $550 on the bounce and again at $575. We think the stock will continue to shakeout in the coming weeks. That said, we will continue to build a position through $600. This is a multi-year buy and hold opportunity.

Disclosure: The article expresses solely the opinions of the author. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.

References

Advertising
https://www.statista.com/topics/990/global-advertising-market/

Barron’s
https://www.barrons.com/articles/advertising-is-getting-crushed-by-covid-19-why-facebook-google-cant-save-the-industry-51585955751

CTV – OMDIA Research
https://omdia.tech.informa.com/pr/2021-feb/svod-has-paved-the-way-for-avod-growth-globally

CTV and TTO
https://iabtechlab.com/blog/ott-vs-ctv-what-is-in-a-name/

Motley Fool Premium – The Trade Desk
https://www.fool.com/premium/rule-breakers/coverage/1069/coverage/updates/2021/05/13/buy-the-trade-desk/

Seeking Alpha Premium
https://seekingalpha.com/symbol/TTD

The Trade Desk Investor Relations
https://investors.thetradedesk.com/investor-overview

https://investors.thetradedesk.com/news-releases/news-release-details/trade-desk-reports-first-quarter-financial-results-4

https://investors.thetradedesk.com/news-releases/news-release-details/trade-desk-announces-ten-one-stock-splithttps://investors.thetradedesk.com/stock-information/stock-quote

Unified ID 2.0
https://headerbidding.co/unified-id/

Disclosure
I am/we are long The Trade Desk (“TTD”) either through stock ownership, options, or other derivatives. 

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Nothing on this site nor any published commentary by The Investor Weekly is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.