A Member of Pat McKeough’s Inner Circle recently asked for his advice on a digital advertising company that allows clients to purchase online ads across various formats and devices.
Pat likes the company’s historically strong growth and status as an industry leader. However, he can’t recommend the stock due to data-tracking changes planned by Google that could affect the company’s business prospects.
The Trade Desk Inc. (Symbol TTD on Nasdaq; www.thetradedesk.com), operates a self-service, digital-advertising platform where clients make their purchases online across various formats and devices.
The Trade Desk is headquartered in Ventura, California; it has 1,200 employees worldwide, spread across 23 offices in North America, Europe and Asia Pacific.
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The company offers a demand-side platform, which means that buyers of digital advertising can manage multiple ad and data accounts through one interface rather than having to open accounts with each supplier of digital content. As the biggest supply-side vendors of digital advertising, Google and Facebook control over 80% of the global digital ad market.
The Trade Desk’s exclusive tools and algorithms provide real-time data that let clients track exactly who sees their ads. They can also follow how those consumers interact with the content. That lets advertisers optimize their ad placements.
The company generates revenue by charging advertising agencies and brands a fee based on its client’s total advertising expenditure. It also sells data and other value-added services.
This technology has enabled The Trade Desk to capture an increasing share of the $750 billion global ad market.
Over the past five years, total advertising placed through the company’s platform increased 320.0%, from $1.0 billion in 2016 to $4.2 billion in 2020. The Trade Desk’s total revenue rose 312.0%, from $202.9 million to $836.0 million.
Excluding one-time items, earnings during that time improved 850.1%, from $35.3 million in 2016 to $335.6 million in 2020. On more shares outstanding, earnings per share climbed 669.7%, from $0.89 to $6.85.
In the three months ended December 31, 2020, The Trade Desk’s total revenue increased 48.2%, to $319.9 million from $215.9 million a year earlier. Excluding one-time items, earnings jumped 158.1%, to $184.8 million, or $3.71 a share, from $71.6 million, or $1.49.
At the end of that quarter, the company held cash of $624.0 million and had no long-term debt.
Inner Circle: Company seeks to be a long-term industry leader
Trade Desk has forged direct relationships with publishers and media companies like Comcast Corp.’s NBCUniversal, Condé Nast, Fox Corp., News Corp., Spotify, TikTok and Vox Media. These companies post their ad space directly on Trade Desk’s systems.
The company also operates The Trade Desk Edge Academy, which provides online training and certification in digital advertising. The program aims to help establish the company’s platform as the leader in demand-side advertising.
The Trade Desk first sold shares to the public in September 2016 at $1.80 per share. (All share prices reflect the 10-for-1 stock split on June 9, 2021).The shares hit a high of $31.83 on February 19, 2020. They then fell to as low as $13.60 in March 2020 before rebounding and then soaring to $97.28 in January 2021. The stock has since dropped to today’s level.
That drop was partly due to the COVID-19 slowdown and weakness overall for technology-related shares. But the stock’s price decrease is also the result of recent changes announced by Google.
Next year, Google plans to remove third-party “cookies” from its market-leading Chrome browser. Cookies are text files, or small pieces of computer code, that websites attach to a visitor’s web browser.
Cookies then stay with visitors after they leave that website and go on to other sites. Advertisers and publishers are then able to continue showing users the same ads regardless of where they go online.
At the moment, advertisers use the data harvested from people’s web browsing to figure out whom to serve ads to, and whether a targeted user went on to buy the advertised product. After Google’s change, advertisers won’t be able to get as detailed a picture of either.
To offset the loss of cookies, The Trade Desk is recruiting publishers and ad-tech companies to create a new identifier for users: a Unified ID would be compiled from the email address of an individual Internet user, who must provide consent. The ID would be scrambled to protect the privacy of the user, but websites and advertisers in the network would be able to access the user’s Unified ID profile and contribute data to it.
However, Google has said that it would not use any such alternate identifiers. It also believes that they won’t satisfy consumer expectations for privacy.
All of this—plus the likelihood that Facebook will follow Google’s lead—adds considerable uncertainty for The Trade Desk going forward.
Recommendation in Pat’s Inner Circle: We don’t recommend The Trade Desk Inc.
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