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The Trade Desk – programmatic adtech superstar, which is emerging as a rival to Google and Facebook

September 28, 2020

The Trade Desk/ TTD Buy @ $473  MV: $22bn  Next figures: 5 November No of times recommended: 11  Price when first recommended: $127.98

The Trade Desk is an adtech company, which means it applies technology to solve advertising problems and make the advertising experience more effective.

The company was founded by Jeff Green in 2009. Before that he founded another company in the same field which was acquired by Microsoft. He says now that if he just wanted to make money he would have stayed at Microsoft. He left and founded The Trade Desk because he wanted to make a difference. In the process he has become a billionaire although still in his early 40s.

TTD is classic 3G. It has a great chart (see above), great growth (see table below) and as we shall see a great story and a huge opportunity. Subscribers will have noticed that I have been writing more about individual stocks recently. This is partly because share prices have risen sharply so there is no longer the same across the board buying opportunity that there was in March, April and May.

It is also because I am on the hunt for what I call superstocks and one of the key characteristics of these stocks is that they have a huge opportunity. My idea of a huge opportunity is an opportunity which means a company can become really big by which I mean valued over $100m, maybe over $1 trillion. These are stocks which are appropriate for big bets because they could win big. They are not risk free but they are worth taking a risk for because they could be life changing investments.

Another key characteristic of these stocks along with the open-ended opportunity is electrifying top management. Jeff Green is that kind of guy. He makes no secret that he is trying to change the world and it is the offer to participate in that process, which is attracting top talent into the business. At the latest count there were 1,350 employees and a network of offices around the world including a growing presence in China and the Far East.

TTD’s customers are mainly advertising agencies, Ogilvy, Publicis and WPP together account for around 30pc of total turnover although the group had 820 clients at the latest count, up from 137 in 2014. These agencies are often acting for global businesses and even smaller business are going global these days. In order to serve them effectively, TTD itself, needs to be a global business. It is probably also attracted by China because its two main opponents for ad spend, Google and Facebook, are severely curtailed in their Chinese operations.

TTD is a platform, not a media owner, so doesn’t have the problems with content that the two giants have. TTD is not exactly an alternative to Google and Facebook but it is very much a rival in the battle for adspend dollars and believes it has a comparable opportunity; that’s right, it is not inconceivable that one day TTD will be going head to head with the giants and may even be of comparable size. After all these are three companies that make effectively all their revenue from advertising-related revenues and TTD, as we shall see below, believes it has ta better offer and represents the future of advertising.

One way to start to get your head around what TTD does is to realise that Green got the idea for the business partly from looking at what has happened in financial markets. If you want to buy shares you don’t pick up a phone; you just go on line, find the share you want and buy it. It takes seconds and you know you are buying exactly what you want at the best price. Green thinks the ad market should be the same and has created a platform, The Trade Desk (it’s all in the name), which enables you to buy ads almost as quickly and easily as you can buy shares, with the same access to data, the same best available price and with a host of other information to enable you to spend your precious advertising dollars to maximum effect.

He also describes this as like a one on one approach to advertising. Way back in the day companies used door to door salesmen to sell stuff. It was highly effective because of the one on one interaction, the targeted approach and the payment by results. Contrast this with a billboard, where every passing driver sees it and the advertiser has no idea how effective it is but just buys the space because he is afraid sales will fall if he doesn’t.

So one of the biggest things TTD claims is that its platform makes your ad spend vastly more effective. It generates huge amounts of useful data and all your ad spend on the platform is targeted. The way Green puts it you may spend more for fewer ads but the value is vastly greater than say an ad placed on linear TV, which falls into the famous trap that you know 50pc of your ad spend works but you don’t know which 50pc.

TTD is all about the Internet and digital advertising. You can use TTD’s platform to place ads on anything coming over the Internet, streamed content on any device, mobile, video and so on. This is great for advertisers and the agencies who represent them because unlike traditional media,  linear TV, cinema, print magazines and newspapers, content on the Internet is very fragmented but very important (a) because over 50pc of ads are now digital but also because the consumers of this content are the increasingly important millennial and Gen Z (even younger) customers that advertisers desperately want to contact.

TTD is a platform which enables media content owners to sell advertising to agencies on its adtech platform, which is an incredibly sophisticated piece of technology. This is how TTD describes what it does:

“We are a technology company that empowers buyers of advertising. Through our self-service, cloud-based platform, ad buyers can create, manage, and optimise more expressive data-driven digital advertising campaigns across ad formats, including display, video, audio, native and social, on a multitude of devices, such as computers, mobile devices, and CTV. Our platform’s integrations with major data, inventory, and publisher partners provides ad buyers reach and decisioning capabilities, and our enterprise APIs (application programming interfaces) enable our clients to develop on top of the platform. We commercially launched our platform in 2011, targeting display advertising. We have since extended our platform to address additional advertising formats, and in 2019, approximately 79pc of gross spend on our platform was for mobile, video, audio, native and social. Our clients are primarily the advertising agencies and other service providers for advertisers, with whom we enter into ongoing MSAs (master services agreements). We generate revenue by charging our clients a platform fee based on a percentage of a client’s total spend on advertising. We also generate revenue from providing data and other value-added services and platform features.”

Another quote helps you understand more of the dark arts that make this technology possible and the scale of the opportunity.

“Most consumers are unaware that when they land on a webpage, watch a video, use a mobile app or watch an Internet-connected TV, there is often an auction for advertising inventory being run in about 1/10th of one second behind the scenes as the content loads. Our platform provides access to approximately 3.2m ad spots on average every second for our clients to bid on across millions of different scaled media sources—websites, shows, channels, stations and streams. Our technology makes it possible for ad buyers to compete in those real-time auctions. Our platform helps our clients determine what ad will display and what price they should pay for every ad opportunity a buyer can consider.

        In 2015, approximately $639.6bn was spent on global advertising (including approximately $237.2bn on TV advertising and approximately $51.1bn on display advertising), according to International Data Corporation, or IDC, and approximately $14.2bn was transacted in the programmatic advertising spot market via real-time marketplaces, according to Magna Global. We aim to power every agent of every advertiser in both the spot and forward markets, including upfront purchases, for programmatic advertising.

        We also believe that the efficiency of programmatic advertising will lead to a greater percentage of every advertising dollar ending up in the pocket of publishers. Publishers can now generate revenue without the large sales forces that were required in the past. Higher revenue yields and lower operating costs make it possible for publishers to increase their investment in creating high quality content.

        Programmatic advertising is currently a small portion of total global advertising spend. Largely because of the price discovery benefits, we believe eventually a vast majority of advertising will be transacted programmatically.

        We enable the programmatic marketplace with our self-serve platform. The unique architecture of our platform allows users access to highly granular targeting and reporting options, which we refer to as expressiveness. When combined with our data management capability and first-party data, our clients can reach their highly specified audiences with customised messages and generate favourable campaign outcomes.

        By using our technology and the reach of the Internet, we can power this data-driven 1-to-1 messaging with massive global scale. We believe in order to do this effectively, we have to be a buy-side only platform across a spectrum of media, which we refer to as omnichannel. As the biggest brands desire to communicate with consumers worldwide, we have to be global, which is why we have employees and offices around the world.

        We derive nearly all of our revenue from ongoing master service agreements that give users constant access to our platform, instead of insertion orders, which typically are one-off deals to run single campaigns.

        We have grown faster than the programmatic market and have achieved significant revenue scale with $552.3m in gross spend in 2015. Our revenue was $113.8m in 2015, representing a growth rate of 156pc over $44.5m in 2014, while programmatic advertising spend in the industry grew from $10bn to $14bn, according to Magna Global, representing a growth rate of 40pc over 2014.”

One of Jeff Green’s hobbyhorses is – who is going to pay for the Internet because it has to be paid for somehow. Most people have grown accustomed to free access. We pay a subscription for Netflix and Disney streamed video content but nobody expects to pay for Google Search, Facebook or most of the videos they watch on YouTube. This only works because of associated advertising and these ads are only affordable, especially for millions of smaller enterprises like the 80m small businesses, which promote their wares on Facebook  because it is targeted and relevant; and that can only happen because of a vast behind the scenes data gathering operation that raises privacy issues.

The bottom line which many people and politicians have not fully grasped is no relevant ads, no free Internet. TTD collects data on a massive scale but it is either anonymous or proprietary to the brand and media owners, who accordingly trust TTD’s platform with collecting their data.

Global media is around a trillion dollar market and worldwide ad spend is around $700bn plus. Green believes these huge markets will eventually become almost entirely programmatic. It makes the whole advertising process vastly more effective for consumers, media owners and advertisers. This presents a huge opportunity for TTD because Green built this platform at the dawn of the programmatic age so is the front runner in accessing this opportunity.

Where exactly this leaves Google and Facebook, what Green calls the walled gardens is not clear. They will adapt but may be limited in their response because unlike TTD they are effectively massive media owners. TTD doesn’t own any media and only acts for the buyers. It is not even a disrupter but describes itself as an enabler because it makes the ad buying experience better for media owners, advertisers and its advertising agency clients. Green describes what he is doing as win win win for all the key participants. It is even good for the customers who see fewer, more relevant and maybe even less obtrusive ads.

There is one particularly exciting opportunity for TTD, which is connected TV. Traditional TV is BBC, ITV, cable TV, SKY, all the stuff we have had for years. Connected TV is Netflix, Disney, BBC iPlayer, content which is streamed on demand and funded by subscription or ads. It is still early days but it is increasingly apparent that connected TV, ad funded video on demand or subscription funded video on demand is the future.

Green further notes that there is a limit to how many subscriptions people will pay for, maybe Netflix, Amazon Prime and Disney but other new comers are going to have to consider ad funded models and that may even spread to Netflix, Amazon and Disney one day. This is a huge opportunity for TTD for all sorts of reasons.

One reason is that UGC, the user generated content that appears on YouTube, Facebook, Instagram, Twitter et al is often full of hatred, left and right wing bias and unacceptable to owners of valuable brands. TV is not like that because it is all curated content so perfect for advertisers, especially as it grows in scale.

TTD was initially hit hard by the coronavirus because programmatic advertising is so flexible that it is easy to turn off the tap, whereas ads on linear TV are booked months in advance. But the other side of the coin is that the virus disruption presented businesses with a huge opportunity to win market share so after the initial shock revenue began to pick up.

“While we ended Q2 [to 30 June 2020] with a negative 12.9pc year-over-year revenue decline, since April we saw spend on our platform increase every month and nearly every consecutive week. As advertisers have been more deliberate, ad spend turned positive on a year-over-year basis in mid-June, and that trend has continued through the month of July. On a personal note, I was surprised at how unified the ad industry was in pausing activity starting in mid-March. We took a healthy economy, a healthy industry and collectively hit the pause button.

I’m not sure if that sort of synchronised response has ever happened before. At the same time, I was equally surprised how unified the early phases of recovery have been so far. Not just that advertisers have returned in a consistent way with a renewed focus on programmatic, in fact, nearly all of the large brands have increased their spend on our platform. This includes spend from industries such as CPGs [consumer packaged goods], food and beverage, technology, healthcare and even automotive.”

Even more exciting for TTD has been the trend in the CCTV [connected TV] market.

“They [an unnamed multinational food and drinks company] chose The Trade Desk for two main reasons: one was the ability to apply measurement and offline attribution tools to understand exactly who they were reaching; the second was the tools and breadth of premium inventory on the platform for buying CTV [connected TV] instead of UGC [user generated content]. Of course, the rapid emergence of CTV as a viable option is key here.

For advertisers access to a growing base of brand-safe premium content could not contrast more with what is available today in user-generated content, which brings me to my second point: the surge in connected TV. In Q2 despite the impact from COVID, CTV grew about 40pc year over year. In Q3, we anticipate that the CTV spend growth rate will more than double Q2. We believe the COVID pandemic has permanently accelerated the growth of connected television, changing the TV landscape forever.

And no company is better positioned to grab share in CTV than The Trade Desk. As one leading CMO said to me recently and I quote, I want to move as much budget from social to CTV as possible, as soon as possible. And that’s not an isolated comment. Advertisers are unified about this.

They understand that data-driven advertising is a better place to measure performance and target key audiences. And now they can bring that approach to their massive TV ad campaigns. And it’s not just our concerns about user-generated content that are forcing this. There are two other major forces at work.

One is the rapidly increasing inventory of premium CTV content. The other is the consumer shift toward CTV, accelerated by the COVID pandemic. Let me quickly remind you what we discussed last time on our earnings call. Our research suggested that 11pc of U.S. households would cut the cable TV cord by the end of the year. That’s about triple the rate of cord cutting that we’ve come to expect the last few years. That cord cutting rate rises to 18pc for the very coveted 18- to 34-year-old demo. And the No.1 reason households would keep cable TV? Live sports. 60pc of them cited live sports as the primary reason they hang on to cable. And you don’t have to take my word for it. Fast forward three months, Roku recently issued its annual survey into TV viewing trends.

And according to their research, 32pc of U.S. households have now cut the cord or never had it, and a further 25pc are shaving their cable TV costs. 45pc of those cord shavers said they expect to fully cut the cord by year-end. The No.1 reason? Cost savings. In the current environment, many households are looking at their home entertainment costs and their cable TV bill as often the most expensive part of their TV content lineup. But related to that, the No. 2 reason: access to free streaming TV services.

As more broadcasters make their content available through AVOD services, the cost equation for many households is something of a no-brainer. And according to the same survey, even if live sports make a comeback, less than one in five cord cutters said they’d rethink their decision because those same sports events are now available over streaming services. So whatever assumptions you have about the shift toward CTV and how many years it would take, you can throw those out because COVID has changed everything. Advertisers can’t ignore these shifts in consumer behaviour, and they don’t want to.

As I said, their growing concern about user-generated content, which is only exacerbated by recent events, represent the straw breaking the camel’s back. They want to shift to the premium content that CTV now enables. Their consumers are there. And in addition, not only has NBC launched its new streaming service, Peacock, on July 15, but Pluto reported three times the viewing hours in April that it had at the beginning of the year.

Tubi reported that their viewing hours were up 100pc. In April, Vudu reported an increase of 55pc in the stay-at-home environment. Such is the growth of AVOD that these platforms have recently been acquired by Viacom, Fox and NBCU, respectively. In addition to moving to where viewers are, advertisers also benefit from applying data to their TV campaigns for the very first time.

For example, after the COVID lockdown started, a large U.S. insurance company wanted to be more data-driven in their TV spend. Their goal was to extend reach while managing frequency. Using a third-party measurement firm through our platform, the results were transformative.

Even though CTV CPMs are roughly three times those of linear CPMs, using CTV lowered cost per unique household by over two and a half times. Even more eye-opening for the brand using CTV on our platform, they were able to reduce ad frequency to the consumer by over 80pc compared with their previous linear campaigns. In this case, site visits were two times more efficient when using data-driven CTV versus publisher data.Overall, this resulted in a significant reduction in cost per acquisition.”

My impression is that the virus has triggered a tipping point in viewing habits that is going to be hugely beneficial to TTD. The effect was masked in Q2 because initially programmatic ad spend collapsed but my hunch is that when Q3 is reported on 5 November the picture is going to be very positive for the group not just for that quarter but looking ahead to Q4 and 2021 and beyond.

Finally I would like to give you my take on the numbers. In very broad terms about 20pc of the gross spending on the TTD platform goes through to revenue. The group then spends roughly equal amounts on platform operations, sales and marketing, technology and development and general and administrative costs.

Like so many technology companies it is all about the battle for territory and this is being waged on a global scale. There are powerful network benefits for TTD from becoming bigger as it can offer more data and media inventory to its ad agency clients and through them to the brands and businesses they represent. It makes sense to invest aggressively in growth.

Nevertheless, TTD is a very scaleable business. As you can see 1350 employees were able to handle gross spending over the platform of $3.1bn and group turnover of $661m in 2019. This means that despite investing at scale in growth the group is still profitable. In the last couple of years around 3.5pc of gross spending on the platform filtered through to net income.

I think that going forward that figure could easily become more like five per cent. This means we are looking at a business that is targeting winning a significant share of global ad spend onto its platform and then taking five per cent of that as profit. Looked at like that I think you can see that The Trade Desk has an incredible opportunity.

The key to spectacular investment success is to have some huge winners in your portfolio and the patience to let them win big. The Trade Desk is another exciting candidate with a great team, an amazing story and a huge opportunity.

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