The Trade Desk

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 5/5

The Trade Desk, Inc. is a global technology company that operates a cloud-based platform for real-time programmatic advertising.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

The Trade Desk (TTD) is a global ad tech company that provides a self-service, cloud-based platform for programmatic advertising. This means they don’t create ads themselves or sell the actual media placements, but instead, they provide the technology that allows advertising agencies, brands, and other partners to manage their digital ad campaigns across various platforms such as desktop, mobile, and connected TV. Their platform also includes a comprehensive suite of data, analytics, and reporting tools. TTD earns revenue primarily from a percentage (or fee) of the media spend handled through their platform, rather than directly buying and selling ad space. It acts like a bridge between buyers and sellers of advertising space. They focus on enabling clients to buy advertising data, which they leverage for insights into campaign optimization.

Industry Dynamics

The advertising industry is in a period of flux with increased focus on digital platforms. The rise of connected TV, mobile advertising, and programmatic buying is shaping the sector. Programmatic advertising- where software is used to buy digital ads- is gaining market share due to efficiency and cost-effectiveness. The industry is increasingly relying on data to identify relevant audiences, a trend that favors companies that can provide a comprehensive solution. The decline of traditional media (such as newspapers, linear tv etc), increase in online video, social media dominance and the rise of Connected TV is also a key change in dynamics of the industry.

Competitive Landscape

TTD operates in a competitive landscape with several major players in the ad tech space such as Google, Amazon, and Magnite, each with different strengths and strategies. Google, for example, is a dominant player that owns both the platforms (search and YouTube) as well as tools to purchase ads. Amazon on the other hand, has vast amounts of consumer data from its e-commerce business that provides it with strong analytical advantages. Magnite, a large Sell-Side platform, controls a large volume of inventory. The industry, however, is still fragmented and many companies are vying for market share. There is also rising competition from connected TV companies, that offer their own DSP services. In short, the industry is not a winner takes all industry, the competition is severe, and many companies are competing for growth and the new technology is being adopted rapidly.

What Makes TTD Different?

While competing in the ad tech space, the company has several distinguishing factors. TTD is independent, and it is one of the biggest buy-side players. This means that it doesn’t own the inventory on which ads run, and that gives it access to almost every major supply-side platform. This makes TTD a neutral player that has a vested interest in bringing the buyers and sellers together, unlike Google and Amazon, which also own the supply-side platforms. It also offers a self-service platform which allows advertisers and agencies to have more control over their advertising spends, data, and bidding strategies. It also has a data marketplace that allows access to third party data. Its focus on advanced analytics has also allowed the company to generate valuable insights and actionable data, and use of AI and Machine Learning. Also, the company’s core philosophy is to not compete with its clients in any way. It seeks to act as a neutral technology partner to the ecosystem.

Financial Overview

TTD’s latest financial results show strong revenue growth with some slowing from the rapid growth that it saw in the 2010s and early 2020s. Revenue increased by 27% year-over-year in the latest quarter, and 25% in the fiscal year of 2023, which is pretty solid. Platform spend also increased by 25%, this makes the company a revenue generator, as revenues are determined by how much advertisers spend on the platform. Gross profit also increased by 27% and is around 81% of the revenue which shows the company has maintained its profitability through growth. Operating expenses continue to increase as the company is growing, which means there has been a slight decrease in operating income and margins. Even after accounting for these costs, there is still an operating profit margin of 20.8%, which is very profitable. TTD is still free cash flow positive and has a FCF of 433 million dollars which grew from a previous year, this number however may be lower than the net income due to a large capital expenditure for additional office space. The company continues to invest heavily into development of new product, technologies, and platforms, which has resulted in higher expenditures. Also, since the company is internationalizing, there has been an increase in staffing and offices. TTD’s strong profitability with consistent revenue growth, coupled with consistent cash flow makes it quite strong financially.

Latest News and Concerns

  1. Guidance: Despite strong performance, TTD provided weaker guidance for the upcoming quarter, reflecting management’s view of continued economic uncertainty, which may slow down the spending on advertising.
  2. Macroeconomic Uncertainty: The company continues to face a challenging macroeconomic environment, including pressures from global inflation, rising interest rates, and other geopolitical issues that might impact the advertising industry.
  3. Competition: Competition is intensifying in the ad tech space, particularly from companies that offer a fully integrated buy and sell side platform such as Google.
  4. Supply Path Optimization: The advertising industry has a push to have fewer parties touching and using their data, which might reduce the fees or take-rates generated by players such as TTD.
  5. Connected TV Challenges: It’s unclear how the changing Connected TV landscape will affect TTD’s revenue, there may be a push from the streaming services to do direct sales.
  6. International Expansion: Expansion outside of the US is a key part of TTD’s growth strategy. This has inherent difficulties such as regional competitors, different tax laws and political environments.

Moat Rating: 3/5

TTD has a narrow moat. This moat stems primarily from network effects and high switching costs.

  • Network Effects: TTD’s platform becomes more valuable as more advertisers and data providers utilize it, creating a cycle that attracts further users and data, thereby increasing the company’s competitive advantage and stickiness. This is less apparent however since a lot of their clients use the platform through third party agencies who also use their platform.
  • Switching Costs: The high switching cost for clients come from the difficulty and high complexity of integration with a new platform. It may take significant effort, time and resources to move away from TTD’s platform, hence allowing TTD to maintain business with high retention rates. However the company faces competition from Google, Amazon, and increasingly from other integrated platforms. It is hard to say whether those competitors could be kept at bay with TTDs moat, hence a narrow moat.

Risks to the Moat and Business Resilience

  1. Technological Disruption: The ad tech space is particularly prone to innovation and disruption, whether through AI, new advertising formats or new ways to do the business-this might make TTD’s product uncompetitive and irrelevant.
  2. Competition: TTD is fighting on a multi-pronged front against Google, Amazon, and a whole host of other players- that could erode profit margins and revenue growth as they fight for market share.
  3. Regulatory Risk: Changing regulations around data privacy and usage could significantly affect TTD’s business model and increase compliance costs.
  4. Client Concentration: The company relies on a few large advertising agencies and tech companies, a loss of any one of them might significantly affect TTD’s revenue.
  5. Loss of talent: The company needs to retain its talent to innovate, if a large chunk of employees choose to leave and join competitors, it might make them less competitive. TTD, though, has shown that they can survive industry disruptions, changing business models, and client issues, and can still generate positive returns on invested capital and free cash flow. They’re a market leader in their category and will have sufficient strength to tackle such problems when they occur.

Understandability: 2 / 5

The ad tech industry, while rapidly growing, is complex and technical, requiring a deep understanding of the industry’s dynamics and players for the average investor. TTD also has some complex financial results which take a while to understand. It will take a certain amount of time and expertise to understand the business and its inner workings. Also, the business is fast-paced, so keeping up with technological innovations, trends in revenue and competition will be a continued uphill struggle. The company does not generate revenues based on units or production but rather via complex revenue sharing formulas that also need to be understood.

Balance Sheet Health: 5 / 5

TTD maintains a robust financial position, characterized by a good balance between assets and liabilities, very high cash reserves, high profitability and positive cash flows. The company’s debt is very negligible and very manageable, which makes it financially stable. The company also has an excellent ability to generate free cash flow which will ensure it can expand into the future without financial problems. They also have an ample cash flow which will allow them to buy back shares, reinvest in the business and make acquisitions, if they want to. The company has shown consistency in these trends over the past several years, and their financial stability is a core strength of the company.