(Part 2) Buying The Trade Desk (TTD Stock)
Advertising For the Rest of the Internet
Happy New Year!
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Last week I introduced the merits of investing in The Trade Desk (Part 1).
We answered the following questions and learned about the company’s growing competitive position in a large and growing market:
Is the company a Leader in a Large Growing Market?
Does the company have a Growing Competitive Advantage?
Today, we will continue with the remainder of the investment checklist and answer the following:
Does the company have Visionary Leadership?
Could it 10X in 10 Years?
Does the company have Visionary Leadership?
Jeff Green, the founder and CEO of The Trade Desk, is an “adtech lifer”. He started out as a media buyer at an ad agency in the early 2000s. In 2003 he started AdECN, an online ad exchange where media publishers could sell their inventory directly to ad agencies. Microsoft purchased AdECN in 2007.
Green later left Microsoft to start The Trade Desk. He didn’t need to. He had already become wealthy. He had different motivations. Why else would he put himself through the startup grind all over again?
When Green started The Trade Desk, his goal was to “build a company for the next 100 years.” (he’s been saying that ever since he was raising his seed round).
The company has a massive mission: To Fund Media.
Green is a strong believer in the online advertising business model. He believes that every ad impression is worth something different to every advertiser, and that programmatic ad buying will make advertising significantly better.
To accomplish this, Green decided to focus on the buy-side because he believed the demand side of the advertising transaction will always have the advantage. This demonstrates Green’s forward looking thought leadership.
I appreciate that Jeff is always positioning his company for the long term. For example, he realizes that international markets are where TTD’s growth will come from (⅔ of ad spend is international). So he views his company as a global company. This isn’t simply lip service. The team itself is distributed. International offices aren’t second class citizens (like they are at many tech companies), they are staffed just like domestic offices, with multiple functions present, particularly engineering, and not just sales reps.
I used to work at Microsoft when AdECN was acquired, and vaguely recall speaking with Jeff once. Although I don't recall the details of our conversation, I do recall coming away thinking Jeff’s the real deal - he was smart, articulate and very forward thinking.
Lastly, I am glad that Jeff expects to run this company for a long time to come. The night before going public he was thinking “There is no going back. [By going Public], I am making a career decision [for] the next 10 years of my life.” [Link] That has me excited to tag along for the ride.
Could TTD 10X in 10 Years?
Of course, this is unknowable. So answering this question is an exercise in creative writing. That said, unlike when valuing Dependables, when valuing a Maverick like TTD, current company results are not great proxies for valuation. Instead, we need to think about what the company may look like 10 years from now, IF it’s successful. That is difficult, imprecise and open-ended. The Trade Desk is a Maverick after all.
Let’s start by looking at the ad market. Global ad spend is estimated to be about a trillion dollars in 10 years. In 2019, digital ad spend ($333 Billion) was already 50% of total ad spend. In 10 years, it’s likely a higher percentage, let’s say 70% so $700B is our market size. Programmatic ad spend is will likely be the large majority of that.
Of that, what percent of digital ad spend will go to the “rest of the Internet”? Let’s call it 30%. This means that TTD’s total addressable market is roughly over $200 Billion (30% x $700B). With 2019 revenue less than $700 Million (<1% of $200 Billion), as long as TTD can continue to execute, there is tremendous growth ahead for this company.
This growth will likely come from some or all of the following avenues (and others I haven’t thought of):
International Markets: International ad spend is ⅔ of total ad spend. For TTD however, international markets represent only ~15% of their billings today. This represents a huge opportunity.
Linear TV Transitions to Connected TV: This will likely create significant new ad inventory for TTD.
Radio Transitions to Podcasts: This will also create significant new ad inventory for TTD.
Any new technology platforms that emerge will likely have an advertising component, which would benefit TTD. For example, I’m most excited about eSports. AR/VR could become another growth lever.
Considering the significant market growth ahead, if the company can continue to excel, a 10X is certainly conceivable. This feels a lot like what Amazon felt like 10-15 years ago, an incredibly fast growth market leader with only single digit market penetration.
The Simple Investment Thesis For The Trade Desk
Earlier I wrote about how Simple can be Beautiful. So, I am going to end by summarizing what we have discussed so far, and outline the short and simple case for investing in TTD:
The Trade Desk is the largest independent demand side platform (DSP) which enables advertisers to buy and manage their digital advertising campaigns. TTD is aggregating the ad space that sits outside the walled gardens of the mega Internet Publishers (like Google). By doing so, the company is providing transparency and price discovery in the ad buying process, thereby creating tremendous value for its growing network of ad buyers and sellers.
The company has growing demand, high barriers to entry, weakening competition, and a large total addressable market. TTD benefits from a self-reinforcing flywheel (described earlier) which is starting to spin faster as the company grows it network, and as it is becoming more and more apparent that TTD can be the winning platform in this industry.
If the company continues to execute, and maintain its lead, it should be worth significantly more several years from now than it is today.
With all that said, although TTD is well positioned, none of the above is guaranteed. TTD is still a Maverick. Read about how I think about the risk/reward of Investing in Mavericks.
One Parting Thought: The Trade Desk only needs to double in market cap over the next 7-9 years for it to likely outperform the market. I’ll take that bet. Will you?
You can track the Trade Desk’s performance on the Scorecard.
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Of course, none of the above should be considered investment advice.