Nugget: There are 500 billion digital ad opportunities every day. That’s 74 for every internet connected human.
The Trade Desk is one of the largest positions in the Global Equity Portfolio. As with other technology stocks, it’s had a difficult 2022 from a price perspective. But it’s underlying performance has shown continued improvement and strategically it remains one of the most important internet assets. There isn’t better exposure to the boom in internet content creation than The Trade Desk.
The Trade Desk
The Trade Desk is a company:
that specializes in real-time programmatic marketing automation technologies, products, and services, designed to personalize digital content delivery to users
More simply, if you receive an ad on your phone, desktop, connected TV etc. that is tailored to you, and is outside the “walled gardens” such as Facebook, Google etc. it was sold through an auction facilitated by The Trade Desk.
The Trade Desk collects data about you (largely anonymised) and sells advertising space to marketers that is more likely to be relevant. The Trade Desk knows what sites you’ve visited and, importantly, where you are. This enables The Trade Desk to sell advertising space at a premium of around double the market rate.
Initially, the company represented a niche opportunity to sell advertising on websites that existed outside of the “walled gardens”: New York Times, ESPN, Walmart etc.. But two trends have emerged that have expanded its total addressable market: Connected TV (CTV) and anonymity.
Connected TV
The CTV opportunity came from a realisation by creators that hosting content on YouTube was under-selling its value. The emergence of streaming platforms created by content creators has been a boon for The Trade Desk. The Trade Desk’s ability to know everything about an individual’s digital activity means it offers streaming platforms the best prices for ad inventory. As CEO Jeff Green said:
A tailored TV ad is probably the most effective scaled advertising available today, on or offline … TV is the largest segment of their campaign spend. That unique combination of video and audio, delivered at a time when the audience is leaned in, remains the most effective way to touch the hearts and minds of consumers. As those consumers have shifted, en masse, to streaming platforms, advertisers are following them. For consumers, on-demand content is just better.
This quarter, Netflix has announced its intention to introduce ads to its content as the cost of content outstrips the willingness of subscribers to pay. The Trade Desk is well placed to provide this solution to Netflix. One key advantage for Netflix, who may be tempted to build their own technology, is that by using The Trade Desk they can get access to a subscriber’s complete digital presence. This means a better ad experience as there will be less repeat ads, which increases advertiser and subscriber satisfaction.
The Trade Desk was around at the right time to establish itself as the perfect tool for CTV advertising.
Anonymity
The second key trend that has helped propel The Trade Desk to a strategic internet asset is its approach to anonymity. For most internet users there is no such thing as anonymity. The quid pro quo of the internet is free content in return for advertising. Historically, The Trade Desk knows who you are, but anonymises you when selling your advertising inventory. Recent regulatory changes, that aim to remove cookies, particularly GDPR in Europe, have made this approach strategically important.
Now The Trade Desk is creating an internet ID system, called UID2, that allows internet users to take back some control of their identity when operating on the internet.
This allows consumers to take their privacy settings and controls with them all over the internet … Some of the privacy protection that has been promised to consumers by large technology companies with billions of logins has misled some consumers ... UID2 actually does enable consumers to set preferences and restrictions for each web publisher, mobile app, and CTV app. Their preferences are tied to an encrypted, hashed, salted ID—based on email address or phone number—that a consumer can take with them.
Again, The Trade Desk is in the right place to benefit from the increased importance of anonymity. The big companies, such as Facebook, Google, and Apple, watching you through their logins, are not as flexible in the face of this new legislation as The Trade Desk.
The Current Quarter
The Trade Desk, for a SaaS solution, is more exposed to the economic cycle than most. If advertising spend is down, as it was in the pandemic phase (can’t sell a European cruise in lockdown), The Trade Desk will have slower growth regardless of the productivity improvement and structural shift in the market. The slowdown in growth through the pandemic was concerning. Fortunately, The Trade Desk is seeing rebounding revenues.
There was a 44% increase in annual spend in the year to March 2022. The Q1 comparative performance was similar against 2021 (43%) and stellar relative to the Q1 2019 (160%) performance.
Valuation
Using the SaaS model and assumptions, shows valuation upside for The Trade Desk as CTV, anonymity and economic recovery continue to support growth (and 28x Earnings is cheap for a strategic asset).