The Trade Desk (TTD Stock): Advertising For the Rest of the Internet (Part 1)
Earlier I wrote about Investing in Mavericks. This is a high-risk, high-reward investment strategy. For now, I am going to use the following simplified checklist to help select high-potential Mavericks:
Is the company a Leader in a Large Growing Market?
Does the company have a Growing Competitive Advantage?
Does the company have Visionary Leadership?
Could it 10X in 10 Years?
If the answer to all of the above is Yes, then it may be a Maverick worth buying.
I believe Trade Desk (TTD) fits the bill, and is an emerging Maverick. Let’s explore why.
The Ad Tech Ecosystem
The Trade Desk is an Ad Tech company. Before I describe what it does, let’s first define the different players that make up the online advertising ecosystem.
Advertisers: These are buyers of ad space/inventory, who want to reach customers, by placing ads on Publisher inventory. Eg: BMW looking for car buyers.
Publishers: Sellers of ad inventory. Eg: New York Times putting ads on their website.
Media/Ad Agency: Companies that help advertisers buy ads.
Ad Exchange: A marketplace that enables advertisers and publishers to buy and sell ad space.
Demand Side Platform (DSP): Enables advertising clients to easily buy digital media/ads from one or more ad exchanges, leveraging one or more data sources.
Supply Side Platform (SSP): Similar to a DSP except, they enable publishers to access ad exchanges to sell their inventory instead.
What is the Trade Desk?
Trade Desk offers advertisers the ability to buy ads for the “Rest of the Internet”.
The Trade Desk is a DSP. It represents ad buyers. It provides them a self-serve platform for effectively buying and managing digital advertising campaigns.
Unlike mega internet publishers, who let advertisers purchase ads for their own properties (eg: Google (publisher) enabling Coca Cola (advertiser) to buy ads on Youtube (publisher) or Amazon (publisher) enabling Coca Cola (advertiser) to buy ads on Amazon), the Trade Desk offers advertisers the ability to buy ads for the “Rest of the Internet”. For example, with TTD, advertisers can purchase a 30 second spot on Hulu or an ad for the front page of the NY Times. The Trade Desk uses data and Artificial Intelligence (AI) to help marketers figure out which ad to buy.
The Trade Desk earns revenue by taking a cut of the price difference an ad impression is bought and sold at.
Is the company a Leader in a Large Growing Market?
The Trade Desk has emerged as the largest independent demand side platform (DSP), and is benefiting from strong supply-demand tailwinds in the growing Programmatic Ad Buying market. Programmatic ad buying is still a relatively small percentage of the total advertising market today.
Demand Side: By working with large companies like Google and Facebook, advertisers have realized that buying ads online in a programmatic, data-driven way improves their ROAS (return on ad spend), and therefore helps them grow their businesses more efficiently. As a result, the programmatic advertising space is currently growing at ~20% a year...The Trade Desk however is growing at twice that rate! The company grew revenues at 78%, 51%, and 54% during 2016, 2017 and 2018 respectively.
Supply Side: Trade Desk is starting to emerge as a winner in the consolidating DSP market as it is starting to benefit from economies of scale. Smaller DSPs are either shutting down or getting acquired. This phenomenon is also keeping new entrants out of the market.
Does the company have a Growing Competitive Advantage?
Yes, I believe so.
To believe the answer is yes, one must believe the following:
Advertising will Continue Growing, All Advertising will go Digital, and it will be led by Programmatic Ad Buying.
Internet Attention will not get gobbled up by just a handful of top publishers like Google. That is, the Long Tail will continue to exist.
Advertisers have an inherent Conflict of Interest with Large Internet Publishers and will seek an alternate trusted partner.
Trade Desk is well positioned to benefit from the above.
Advertising will Continue Growing and go Digital, led by Programmatic Ad Buying
Advertising is expected to be a trillion dollar business ~10 years from now. Advertising budgets have increasingly moved online. Programmatic ad buying, a subset, is just a $60B business in the US today. China is in a distant second place, spending just US$7.9bn on programmatic advertising this year, followed by the UK, with US$5.6bn of programmatic adspend. This market will continue to grow.
Programmatic ad buying is a win-win model, as it improves transparency, price discovery, and precision, all at scale.
It creates transparency for advertisers because they can now know where their ads are being placed and also for publishers because they can know who is buying their inventory. It creates efficient pricing, for ad impressions, by matching the supply and demand between ad buyers and sellers. Lastly, data and AI enable precise targeting and attribution at scale, something both advertisers and publishers value.
The Long Tail Will Continue to Exist
The Internet is vast. According to Google, there are over 1.5 Billion web pages on the Internet today. I don’t see this number coming down. In fact, as the world continues to move online, this number should increase. Because of this massive and ever-growing footprint, it’s hard for me to imagine a world where there isn’t a meaningful amount of Internet attention outside the walled gardens of major internet publishers (i.e. The Googles of the world), especially globally. As a result, this should create meaningful amounts of ad inventory outside those walled gardens. Advertisers will want easy access to this.
Jeff Green, TTD’s Founder and CEO, predicts that by enabling real price discovery on the rest of the internet, today’s walled gardens will eventually feel enough economic pressure which will lead to all advertising being accessed and purchased on a relative basis, instead of in walled off silos. That remains to be seen, but I do believe the Long Tail will continue to exist.
How this ad inventory/supply manifests itself can change over time (and likely will). For example, supply could take many forms, from web pages, to mobile apps, to gaming experiences, to perhaps something entirely different, like AR/VR ad inventory. This ever-changing long-tail should provide TTD ample growth opportunities in the future.
The Need for a Trusted Partner
The large Internet Publishers have created walled gardens of ad space. For example, in order to access Youtube’s ad space, one must advertise using Google’s own DSP. Unlike SSPs, Google won’t provide data to help advertisers value their ad inventory. Therefore, it is difficult to value ad space on Youtube (relatively speaking) compared to ad space somewhere else.
This creates an inherent conflict of interest when an advertiser uses a DSP owned by a major Internet Publisher like Google. Google is biased and incentivized to sell its own inventory over a competitors’. Plus, any company that competes with Google will be reluctant to share its customer data (and metadata) with them. As a result, Trade Desk is well positioned to be a neutral trusted DSP partner, because they don’t own any media themselves. They are simply a middleman helping advertisers most cost effectively reach the “rest of the internet’s” ad space.
Trade Desk is Well Positioned To Win
TTD is becoming a better business as it grows, while its competitors are getting weaker. Network Effects and Economies of Scale are reducing competition, and improving ROI.
Here’s how: Advertising is a scale business. Since larger DSPs have larger scale than their smaller competitors, they have lower costs per unit (i.e per ad campaign). As a result, they are likely to provide better bids (and monetize their advertiser’s ads more cheaply) compared to their smaller DSP competition. At the same time, SSPs prefer to send impressions to the DSPs who are more likely to win the auction (rather than working with too many DSPs). Recall that if an ad spot isn’t monetized, neither side gets paid (wasted ad spots are like hotel rooms that remain unoccupied overnight). Therefore SSPs prefer working with larger DSPs because they are more likely to monetize an ad impression. As a result, smaller DSPs have less inventory to choose from over time, which lowers the quality of inventory they can make available to their advertisers, an unfortunate predicament to be in.
This benefits TTD because it gets more ads to place (and more data to target these ads with) and more inventory to choose from. As TTD accumulates more data over time, their insights, analysis and AI get better, and creates better results (ROI) for their advertisers. This, in turn, creates a committed and sticky customer base, and so goes their flywheel.
I believe that DSP consolidation will continue resulting in only a few major independent DSPs left standing. This is already happening. TTD is the largest one so far, and is well positioned to benefit from the continuing consolidation.
In Part 2, we will cover the remainder of the above checklist.