Trade Desk Stock: Deep-Dive Into Demand-Side Platform (NASDAQ:TTD)

This text is contributed by Jun Hao from our Superstocks Seekers staff.

Introduction

The Commerce Desk (NASDAQ:TTD) is the biggest impartial demand-side platform offering advertisers entry to the world’s most premium inventories. TTD has partnerships with well-known publishers like Sky Sports activities and has attracted advertisers like Procter & Gamble (PG) onto the platform. Mixed with its sturdy knowledge analytics, it helps advertisers to drive the best return on their advert {dollars}.

The corporate was based in 2009 by present CEO Jeff Inexperienced and CTO David Pickles.

CEO Inexperienced fell in love with digital promoting again in 2000 as a digital media purchaser at an company. In 2004, he constructed the world’s first advert alternate which was in the end acquired by Microsoft. He and CTO Pickles finally left and based TTD to carry data-driven digital promoting to advertisers over upfront promoting. Upfront requires advertisers to purchase advert inventories in bulk prematurely, with no measurements or knowledge insights into whether or not these advertisements will carry out.

A typical attribute we present in software program corporations like TTD is that these founders are inclined to have deep area experience they usually usually have a essential downside that they wish to clear up within the trade. CEO Inexperienced is one among such.

Now, allow us to go in-depth into the corporate.

Digital Promoting Ecosystem

Allow us to first perceive the function that TTD performs within the digital promoting ecosystem.

There are 5 major gamers – model advertisers, publishers, a demand-side platform (“DSP”), advert alternate, and a supply-side platform (“SSP”), they usually work hand-in-hand to facilitate the transaction of digital advertisements. Advertisers go to DSP to buy advertisements, whereas publishers go to SSP to promote their advert inventories. An advert alternate is a market that merely exists to permit the transaction of advertisements to happen between advertisers and publishers.

As the biggest DSP, the platform has entry to among the world’s premium inventories and high advertisers spenders on the platform.

Portfolio of Premium Inventories

Model advertisers often care about 2 issues – (1) What advert inventories can they’ve entry to achieve their goal audiences, and (2) how can they make the most of knowledge insights to enhance the effectiveness of their advert campaigns? All of those result in: the place can they spend to get the best returns potential on their advert {dollars}?

Based on TTD companions listing, it has over 225 companions. These might be advert exchanges like AppLovin (APP), SSPs akin to Magnite (MGNI), and publishers themselves. That is big contemplating that every SSP and advert exchanges even have direct entry to many publishers, this tells us the attain and frequency that TTD has. Subsequently, it’s not stunning to see why high world advertisers like Procter & Gamble and Comcast (CMCSA) allocate their advert {dollars} to the TTD platform.

With the precise inventories, advertisers are in a position to attain focused audiences extra successfully.

Over 75% of the Advert Age high 200 advertisers spent on the platform, and moreover, the highest model businesses akin to Omnicom Group and Publicis, who signify among the largest manufacturers are additionally utilizing TTD.

These sturdy ties with high advertisers and businesses present that gaining access to a big selection of premium inventories is extraordinarily essential in driving much more advertisers and spending. In our view, this speaks extremely of the worth that TTD is bringing.

After all, gaining access to these inventories just isn’t adequate. Advertisers should additionally have the ability to put their knowledge to work to refine and enhance the effectiveness of their advert campaigns.

This brings us to our subsequent portion.

Sturdy Knowledge Analytics

TTD’s knowledge administration platform (“DMP”) is the platform advertisers use to handle their advertisements.

Inside the DMP, advertisers can add their first-party (“1P”) knowledge akin to their CRM knowledge, and entry third-party (“3P”) knowledge via its knowledge companions. 3P companions are prepared to make their knowledge accessible via TTD as a result of they will leverage its large advertisers base, and in return, the corporate earns a reduce for facilitating the transaction. This makes it a win-win-win scenario for all events.

So, with the DMP, advertisers can acquire insights into their audiences.

TTD’s synthetic intelligence (“AI”) and machine studying (“ML”) engine known as KoA, could make sense of the information, present suggestions to assist advertisers optimize their advert campaigns throughout completely different channels, and automate the shopping for course of. Additionally they get measurable insights and stories on their campaigns. Not solely that, they may obtain Unified ID (“UID”) 2.0, which is an improve various to 3P cookies that helps to enhance advertisers’ match charges (We will likely be going extra in-depth into UID 2.0 in a short time).

This can be a extremely smart platform that makes use of a data-driven promoting method to empower advertisers to yield the best ROI potential.

This additionally means that there’s a flywheel impact in play right here.

The mix of rising inventories will appeal to much more high quality advertisers to the platform, which in flip attracts much more high quality publishers and vice versa. Not forgetting, TTD will ingest extra knowledge, leading to richer knowledge insights, and creating stronger matches between advertisers and publishers. It’s no surprise that for the final 7 years, TTD maintained a robust retention price of 95%.

Unified ID 2.0

Why Are Third-Get together Cookies Phasing Out?

The advert tech trade largely revolves round knowledge as knowledge are useful property. It may be analyzed to supply insights in order that advertisers can ship extra customized and related advertisements.

To do this, 3P cookies are designed to trace and gather private info on customers’ actions on the positioning. Utilizing these knowledge, intensive buyer profiles might be created. Nonetheless, the issue is that every one of those are performed with out customers’ consent or consciousness, making them privacy-invasive. Because of this Google introduced the removing of 3P cookies by 2023. This can be a important blow to the trade as a consequence of Chrome’s market management and advertisers’ dependence on 3P cookies. Cookies are additionally much less efficient as they are often faraway from the browsers and AdBlock software program may also stop 3P cookies from working. Since advertisers rely closely on cookies to gather knowledge, that is worrying for them.

Shifting ahead, the digital advert trade has to arrange for all times with out 3P cookies. However how can they adapt?

Enter Unified ID (“UID”) 2.0, an identifier created by TTD to enhance advertisers’ match charges and to exchange the privacy-invasive third-party (“3P”) cookies.

UID 2.0: Larger Management And Privateness

UID 2.0 was created to supply customers with better management and privateness.

Not like 3P cookies, TTD doesn’t preserve personally identifiable info because it requires solely the customers’ e-mail addresses or telephone numbers. This e-mail handle or telephone quantity will likely be transformed into UID 2.0 (i.e. alphanumeric identifier) and additional encrypted and hashed to forestall customers from abusing it, akin to by constructing buyer profiles out of those knowledge or combining it with different delicate knowledge. Customers may also select to choose out anytime.

That is an improve various to 3P cookies.

Combining UID 2.0 with TTD’s Adbrain, it integrates and analyzes anonymized knowledge of the identical person throughout completely different gadgets, giving advertisers the flexibility to measure extra successfully throughout completely different gadgets to achieve their focused audiences, which isn’t potential with out 3P cookies.

The bigger the UID 2.0 footprint, the upper the match charges it will possibly ship to advertisers. Because of this TTD is targeted on scaling UID 2.0 by driving the adoption from publishers and SSPs.

The reason being publishers personal the connection with end-users, they usually are inclined to have present sign-on programs. They clarify to customers the worth in inputting their e-mail handle or telephone quantity, in alternate for the free content material as customers are required to grasp the trade-off. For small to medium publishers with out present sign-on programs, TTD is already working with Criteo to construct a brand new single sign-on.

However with out sufficient customers’ consent, advertisers discover it arduous to satisfy their marketing campaign goals.

Based on CEO Inexperienced throughout his 1Q22 earnings name, he’s already seeing large adoption by publishers and SSPs:

UID 2.0 doesn’t want some magic variety of single indicators to be on par with the billions of cookies on the market to achieve success. We’re already seeing widespread adoption by integrating with present writer sign-on programs…we’re only some weeks into beta testing. The checklist of publishers, advertisers and knowledge companions which can be at the moment within the integration course of or dedicated to UID 2.0 is bigger than people who we have introduced publicly. The progress we have made on USD 2.0, the momentum we’re seeing is all past something we might have envisioned this early.

Based mostly on the success of TTD’s earlier model of UID 2.0, known as UID, practically each main SSP and advert alternate adopted it. Thus, we firmly consider that UID 2.0 will observe swimsuit because the trade marches in the direction of a greater web by offering customers with extra management and privateness.

Betting Closely On Linked TV In The Early Days

A few years in the past, CEO Inexperienced foresaw that conventional TV will regularly lose market share to on-demand CTV and he wager closely on the CTV market in TTD’s early days.

Individuals had been shifting away from cable networks to TV content material streamed on the web via CTV gadgets. These embrace over-the-top gadgets (“OTT”) akin to Roku (ROKU), sensible TVs, and gaming consoles. There may be additionally an increase in web streaming platforms, significantly subscription video on demand (“SVOD”) and advertising-based video on demand (“AVOD”) platforms akin to Hulu, Sony Crackles, Netflix (NFLX), and Disney+ (DIS), which might be seen via cell or sensible TVs.

These resulted within the manufacturing of extra CTV inventories in addition to a extra fragmented market. This permits TTD to pursue partnerships and consolidate these inventories for advertisers. Thus, permitting them to seize market share.

TTD is partnered up with the world’s largest corporations, together with others like IQiYi, TVB, HOOQ, VIU, Sky Sports activities, Peacock, Discovery Plus, and plenty of others. CEO Inexperienced mentioned that they’re the biggest aggregator of CTV advert impressions throughout each main content material supplier, they usually reached over 80 million households within the U.S. To place issues into context, there are about 124 million U.S. TV households in 2022. This large attain makes the platform extraordinarily enticing for advertisers.

Not like walled gardens like Fb (META) and Google (GOOGL) who command the vast majority of the market share in each social and search, there isn’t a one dominant participant in TV:

There isn’t a one dominant participant in TV as there’s in search or social. TV is a way more fragmented market and the price of content material improvement signifies that a single dominant participant could be very unlikely to emerge…CTV would be the Trojan Horse that finally forces all walled gardens to alter course. And no firm is best positioned than TTD to seize share from the $200 billion linear TV worldwide market because it strikes to digital.

TTD is reaping its fruits of labor, and this is able to not have been potential with out the imaginative and prescient and execution of CEO Inexperienced to capitalize on the transfer from linear TV to CTV.

Financials

Turning to the corporate’s financials, let’s check out its income development.

From FY17, its income has been rising at a formidable CAGR of 40.37% to $1.19 billion, equal to about 4x development. We consider it is because TTD is a self-service platform, which makes it simpler to onboard advertisers and simple for them to be taught to make use of it. This drastically hurries up the gross sales cycle for the corporate. There was additionally the shift from upfront promoting to data-driven promoting because the trade grew to become more and more conscious of the advantages, in addition to the quickly rising channels like cell and video (together with CTV).

Its gross revenue has been rising at a barely quicker tempo of 41.68% CAGR and its excessive gross margin has additionally expanded over time in FY21.

It isn’t stunning to see such excessive gross margin software program companies are usually much less capital intensive. The bigger it grows, the decrease it will possibly cut back its internet hosting prices.

However, its working revenue (“EBIT”) has been rising at a slower tempo of 15.82% CAGR, and its EBIT margin has declined drastically in FY21.

At first look, many buyers can be involved by this and shun away. Nonetheless, we consider an funding thesis shouldn’t be concluded simply by purely trying on the numbers with out understanding the total image. Therefore, we dive in deeper to seek out out if this decline is due to a basic flaw within the enterprise or if there’s a particular temporal motive for it.

The primary wrongdoer for the decrease EBIT was as a consequence of its excessive stock-based compensation (“SBC”) expense. In FY21, it makes up 28.2% of its income.

After its FY21 10-Okay, right here is why.

To search out out the true profitability nature of the enterprise, we’re including again the SBC as a result of (1) this can be a non-cash expense, and (2) this isn’t a enterprise working expense. This offers us an adjusted EBIT of $274 million, a 41% CAGR from FY17. And by way of adjusted EBIT margin is 22.9%.

This can be a extremely worthwhile enterprise which is masked by the non-recurring CEO compensation.

Valuation

We used the discounted money circulation methodology to estimate TTD’s valuation. Much like the businesses we had coated, we’re utilizing a ten% risk-free price (“RFR”), and the reason being we’re benchmarking in opposition to the S&P500 common annual return.

We’re estimating a 30% ahead income, adopted by a 20% development decline for the remaining years. This offers us $3.68 billion in income by yr 5.

What’s the rationale behind our estimation?

TTD’s income is very predictable and recurring as a result of it indicators long-term contract agreements with its prospects. Income is predicted to not decline that shortly as a consequence of its big and lengthy runway, nevertheless, we’re factoring in that advertisers could pull again on their spending to a sure extent in a recessionary surroundings.

In FY21 and FY20, it has a free money circulation (“FCF”) margin of 26.6% and 38.9%, respectively.

The reason being its greater account payables amounted in FY20, and that is affected by the timing of its funds to its suppliers. In 1Q22, its margin was 43.2%. We do anticipate this determine to fluctuate over time, and staying on the safer facet, we’re sustaining a margin of ~27% within the subsequent 5 years. That being mentioned, we is not going to be stunned if the precise annual margins got here in greater than our estimated determine.

Then, after factoring within the 10% RFR and shares excellent with 3% dilution, this provides us discounted FCF per share for annually.

When it comes to exit a number of, provided that this can be a high-quality enterprise with excessive profitability, and has a robust market management, we’re implying a 25x EV/FCF. We additionally keep in mind friends with related margins, akin to Alphabet and PubMatic (PUBM). After including within the cumulative discounted FCF per share and web money per share, the intrinsic worth is $28.58. As of 25 Jul 2022, the share worth was $46.49.

It isn’t stunning, nevertheless, to see that it’s overvalued.

Throughout a downturn, buyers are inclined to lean on corporations with extra certainty like TTD, which has clear profitability, is very resilient, and has predictable income development. These are largely priced in by the market.

Dangers

Chance of Recession

Throughout a recession, advertisers have a tendency to chop again on spending as there’s lesser demand from customers.

Corporations with ad-related income are prone to expertise slower income development. Advertisers are compelled to measure and be extra cautious about the place they’re allocating their capital to yield the absolute best returns. TTD as the biggest impartial DSP is prone to be the popular advert platform for advertisers as a result of large attain and scale of its inventories.

To cite CEO Inexperienced in the course of the 1Q22 earnings name:

…CMOs and entrepreneurs get very deliberate about the place they’re going to spend cash, they usually grow to be very data-driven within the selections that they’re making…which means they’re spending extra with us…within the 2H20 after we noticed that as individuals wanted to be extra deliberate, they had been specializing in the areas of funding which have the best ROI, then they had been consulting with us, and it labored out truly fairly properly in our favor.

In 4Q21, TTD additionally signed an growing variety of long-term commitments with among the world’s largest model advertisers. This speaks so much in regards to the want to accomplice up with TTD. In a recessionary interval, this makes TTD extraordinarily resilient.

Digital Promoting Act & How It Could Have an effect on TTD’s OpenPath?

This yr, a bunch of senators launched a invoice to crack down on the businesses producing greater than (1) $20 billion or (2) $5 billion in gross spending. For (1), this is applicable to Google, Fb, and Amazon, and for (2), it applies to TTD.

Quoting from the invoice:

Digital promoting is dominated by Google and Fb. Google, particularly, is the main or dominant participant in each a part of the advert tech stack: buy-side, sell-side, and the alternate that connects them…If enacted into regulation, this invoice would almost certainly require Google and Fb to divest important parts of their promoting companies—enterprise models that account for or facilitate a big portion of their advert income.

Breaking apart Google and Fb’s promoting enterprise allowed platforms like Digital Turbine (APPS) and TTD to develop, however this posed one other hassle for OpenPath as soon as it reached the $20 billion gross spend threshold because it allowed advertisers to achieve publishers instantly with out the necessity for SSPs. The invoice states that DSPs aren’t allowed to function as SSPs, and vice versa.

So, the query is — is TTD thought of an SSP? In that case, they may have violated the principles if the invoice passes via.

Conclusion

TTD is a extremely smart and largest DSP that allows advertisers to entry the world’s most premium inventories throughout completely different channels. Armed with its AI and ML capabilities, it helps advertisers considerably enhance their match charges. This makes them the popular platform for advertisers.

We additionally talked about UID 2.0, an improve various to 3P cookies which can be seeing accelerating adoption. We consider UID 2.0 will likely be instrumental because the trade prepares for a greater web.

Subsequent, as a result of imaginative and prescient of CEO Inexperienced and the investments made in CTV within the early days, their CTV inventories are rising, and now they’re reaching over 80 million households within the U.S.

This can be a extremely worthwhile and fast-growing enterprise, rising its income, gross revenue, and working revenue at 40% CAGR within the final 4 years. Regardless of the scale of the corporate at the moment, they’re nonetheless reinvesting closely to seize market share in what’s price a $1 trillion TAM.

Lastly, we talked about the dangers together with how advertisers are prone to reduce on spending throughout a recession, and the way OpenPath could violate the digital promoting act whether it is efficiently handed via.

What are your ideas on the corporate? Do tell us within the feedback part beneath.