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TradeDesk: 400% Outlier During Ad Industry Turmoil

TradeDesk has been an anomaly in the ad industry. While regulations chip away at competitors, including the once invincible Facebook and Google, TradeDesk has gained serious traction with a 400% increase in stock price. The triple digit increases occurred after the GDPR regulations on May 25th, which Wall Street believed would strengthen market share for Facebook and Google (the opposite happened, which matched my prediction in numerous Facebook articles). TradeDesk has continued to crush earnings on many accounts with revenue up 56% and earnings per share at $1.09 compared to 54 cents YoY. 

As this analysis points out, there are reasons TradeDesk may continue to climb and there are reasons why TradeDesk could stumble. The earnings have created a blind side to some of the bigger issues around this stock, which are outlined below.  Strong drivers for TradeDesk include connected TV advertising and a universal ad ID. Meanwhile, the ad industry is shark-filled waters, and the track record of third-party ad platforms performing well long-term is nearly non-existent following a year or two in the limelight. This is due to thousands of competitors globally. Unique selling propositions do not last long in this environment, yet TradeDesk has done exceptionally well despite industry headwinds. This analysis takes a closer look as to why $TTD is an outlier and a few of the risks the company has successfully staved off (so far). 

Back to Basics: 

TradeDesk is a traditional “demand-side” or “buy-side” ad platform which allows advertisers to buy ads in an auction-like format through real-time bidding. This is an automated way for advertising to be bought so you don’t have to call up an agency or salespeople to place ads. 

There was an exodus from third-party ad networks, like TradeDesk and its competitors, when audience targeting offered by data-rich Facebook and Google became a reality. We are seeing a slow migration back to home territory now as the ad industry faces scrutiny over the targeting practices offered by tech giants. In contrast, TradeDesk is a third-party data platform and does not deal in first-party data, which avoids the conflict of interest. This allows TradeDesk to use universal ad IDs that the tech giants have ceased using (more on this below).

We are also in an increasingly fragmented world, with users spending time on mobile, desktop, OTT television and pay television. Advertisers want to reach people through an omni-channel approach and third-party platforms have this reach. In many cases, users are retargeted, and this creates a higher ROI for the advertiser. (Google and Facebook also offer retargeting but this is limited to where they have their software rather than being truly omni-channel). This is why TradeDesk reported an 84% increase YoY in customers using omni-channel advertising.

GDPR:

TradeDesk benefited from privacy regulations in Europe called the GDPR, or General Data Protection Regulations, which went into effect on May 25th, 2018. Competitors like Google had to amend the DoubleClick ID due to privacy regulations in Europe because the ID system provided a “common currency” for advertisers to measure the effectiveness of their ads. This went against the new privacy regulations as it fell under identifiable consumer data. Facebook, as well, had to amend their ID. 

TradeDesk’s answer to this was to launch an anonymized ID that helps track users across its channels. Why can TradeDesk do this but Google and Facebook cannot? It goes back to the basics, outlined above, where Google and Facebook have a conflict of interest as they are both first-party data companies dealing in search and social media (they have direct relationships with customers and this has created a conflict of interest). Google and Facebook can personally identify the users whereas TradeDesk cannot. Instead, third-party platforms like TradeDesk assign a number anonymously and track only the number. 

Considering the GDPR came from Europe, it’s encouraging to see the TradeDesk report 206% YoY growth in Germany and 380% growth in Spain. 

TradeDesk does not have a moat here, which is important to remember. Third-party ad platforms using anonymized IDs is advertising 101 and easily duplicated, but TradeDesk is the more agile company in the market and moved quickly on the window of opportunity that the GDPR opened up. The Unified ID solution was rolled out in October of 2018 with platforms like Lotame and SpotX pledging to work with the Unified ID solution. 

Connected TV Advertising:

If you like triple digit growth in revenue, then you will certainly like quadruple digit growth in TradeDesk’s Connected TV (CTV) segment. TradeDesk reported 1000% growth in their connected TV revenue YoY from Q3 2017 to Q3 2018 and 900% growth when adjusting for the period between Q4 2017 to Q4 2018.

Connected TV advertising is hot right now and for good reason. As Digiday puts it, “Two of the big trends in digital media aren’t compatible: The drive to enforce viewability standards and the shift to mobile, particularly apps.” Viewability issues are a serious issue for big brands who are averse to mobile in-app advertising because it’s too challenging to track. In addition, many big brands do not need immediate purchases which is called “purchase intent” – which is mobile’s main value over television.

Here are some comparisons between Pay TV and mobile that I originally published on my Roku stock analysis. 

  • Pay TV has high completion rates as viewers are comfortable in their homes and better prepared to receive advertisements.
    • There are no viewability issues as the screen is designed for a full-width advertisement. This means 100% viewability.
    • Viewers are engaged for lengthy periods of time and want to see the show. Engagement in this setting is far superior to mobile.

“We've never seen an opportunity like CTV before and I don't think we'll ever see one like it, again … It is the biggest opportunity we've ever seen (and) probably ever will.” – TradeDesk CEO, 

Financials:

The financials on Trade Desk are solid and even the most cynical analyst will have a hard time finding fault in the income statement, such as consistent 50-60% revenue growth for over 4 years with the most recent year posting 52% in FY2017 from $202M to $308M and 55% in FY2018 to $477M. We already discussed rampant growth in Connected TV advertising, however, TradeDesk is also strong on mobile at 69% YoY and mobile video at 130%. Customer retention at TradeDesk is at 95% and has been in this range for 20 quarters, according to the 2018 Financial Results (note: many ad companies claim high retention).

However, these numbers come with a price tag with a triple digit PE ratio of 103, at time of writing, and a Price to Sales of 18. 

 

Risks:

They say a picture is worth a thousand words, so I’ll give you a picture of the competitive landscape. You can see who TradeDesk’s direct competitors are under DSP, and many are the incumbents. 

Criteo is an example of what can happen to public ad-tech companies. Like TradeDesk, Criteo’s revenue grew roughly 50% YoY for four years. The company listed on the NASDAQ in 2013 and reached $1 billion in revenues the following year. By 2017, Criteo was trading at all-time highs, when some changes took place as Apple introduced a one-day tracking window in their operating system, called Intelligent Tracking Prevention, which hampered Criteo’s retargeting technology. Regulations from the GDPR also hurt Criteo as they did not pivot fast enough to absorb the changes. Criteo’s revenue from 2017 to 2018 was flat, and while it would be easy to point to ITP or the GDPR, the truth is that there is competition from all sides when you are a demand-side platform (like TradeDesk). Any moment of weakness is quickly challenged by the many other players in the market.

Millennial Media is another cautionary tale in the advertising space. The company went public at $13 per share on March 13thand rose to $27 per share on the first day of trading. By 2015, the stock was trading at $1.75 per share when Verizon AOL acquired the ad company (yes, you read that right - $27 to $1.75).  Ask anyone who was in advertising at that time, and they’ll confirm Millennial Media was one of the biggest names in the industry. 

To spell it out clearly, the risk for TradeDesk is that one of its many competitors go into connected TV advertising or launch a Universal ID. They’ve recently been publicizing their entry into China with partners such as Baidu, however, this isn’t that unique for an ad-tech company. In advertising, everyone works with everyone. There are not many on the image above that aren’t global or doing a lot of business in Asia. 

Takeaway:

TradeDesk has been on my radar since the GDPR and I have not been able to pull the trigger. By now, I would have had enough gains for a safe trailing stop if any news came out from competitors, changes to operating systems, ad blockers or regulations. In hindsight, this stock made an excellent investment in 2018 through time of writing. 

TradeDesk is doing an excellent job of taking advantage of the open window of opportunity from the GDPR. However, if you’re invested, keep a close eye on Adweek, as they tend to have breaking news in the ad industry and keep a disciplined trailing stop. 

As many of my readers know, I am invested in Roku as a connected TV advertising play, and I still prefer Roku for their walled garden and device penetration. TradeDesk is another choice here and I’ll keep you apprised of any others that come along. 

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