Bear's DecQ Review of TTD

LifeOfDreamer · February 23, 2018, 3:39pm

Final comment for now. Gotta get back to life, but I had 3 months of waiting and 2nd-guessing myself after TTD’s drop in November…been soaking it all up, plus a ton of moves to my portfolios today as I was too heavy TTD and too heavy in cash, and I finally deployed some of those funds. Cash is still bigger than any 1 holding in 2 of my ports though…finding it really hard to see value out there since so much has run up the past year.

Ok…another way to understand that this growth won’t be linear is 3 things I think are important:

Green shouldn’t screw up on an ER forecast again. CEO Jeff Green, who is a founder, technically proficient, and who created the ad marketplace with a company bought out by MSFT over a decade over is a passionate and sharp guy. But he screwed up by being a bit too conservative during the Q3 call when he didn’t need to be, and the stock took a hit. He has even stated his intention (since company is still fairly new with IPO in 2016) was to build trust with wall street by always beating/raising. He did technically beat in Q3, but his guidance was picked at because he raised the Full Year guidance by less than he over-achieved in Q3, which gave the market pause about Q4. I think he learned a HUGE lesson here, and you could tell from his tone on the call that he was making sure his points were clear. When he was questioned about EBIDTA pressure or how material the CTV or China numbers were, about whether he was concerned with the Walled Gardens, whether he had concerns about strength of his clients budgets - he was ready with answers, and they were good answers.
Related to the above, Trump’s tax cut wasn’t a sure thing during Q3 announcement. (was signed in late Dec) Brands like Unilever, P&G, Clorox…these are massive companies that are benefiting from the tax cut and to an extent the repatriation of funds. If budgets were tight heading into 2018, prior to the tax cut, which I think Green was concerned about during his Q3 call, it was possibly advertising revenues may take a hit. But with extra funds now for dividends or stock repurchases or to put towards new business goals/objectives, companies can actually move forward faster with the investments needed to grow their use of digital and programmatic.
Sort of related to above also. Mentioned often in adtech blogs or articles is that fraud or inefficient or hard to measure ad metrics are a big concern for major Brands. (think bots clicking on ads and then brands being “charged” for those impressions/views) The Trade Desk is truly best in class in leading the charge to be transparent in fees, to weed out fraud, and have announced partnerships with White Ops for example: http://www.adweek.com/digital/the-trade-desk-and-white-ops-a…
Basically, Green saw this as an issue, because ONLY 2% of the $700b advertising spend is programmatic. Talk about early days. So Green wanted to make sure that TTD wasn’t getting lumped in with bad actors that provide fraudulent advertising ROI…didn’t want to be the baby thrown out with the bath water basically. But - the key is that Unilever and P&G have both publicly been stating that Google/Facebook need to clean their act up and railing against fraud in the digital space. They know programmatic/digital is the future, but CMO’s are reluctant to shift massive parts of the budget that direction if they are going to find out later they paid for a bunch of bots to click on ads…they don’t want to be fired. So in Q3 there was a lot of noise around this, which I think Green was hedging against. Keep in mind, any slowness would be temporary or as Green referred to it “transitional”. These brands will grow their programmatic buckets…but it won’t be LINEAR…it will probably grow in big chunks and many brands will go all-in at once. These are all independent companies getting out of their comfort zone and moving from traditional to digital with their ad dollars. It is a LOT LIKE COMPANIES DECIDING TO PUT SOME OF THEIR APPLICATIONS OR WORKLOADS INTO THE CLOUD FOR THE FIRST TIME. AWS exploded…Azure exploded. But in 2010-2012, I still had clients telling me they thought the cloud hype was a bunch of crap…they were set in their ways. You can’t always see the tsunami coming until your beach chair starts floating away. Point is, TTD, via their Agencies and direct to clients, has been getting the open/transparent best-in-class tech in front of clients and easing their concerns about the move to programmatic. Again - this reiterates why SOW with existing clients is more important than new clients to Green. 2% of $700b growing to 25% of $700B is a massive and exponential move in TAM. That is why the 95%+ client retention and focus is so key to TTD. The base is small…the tsunami is real and it is coming, and the stock price will rise with the tide.

TTD has already built a profitable business, with great company culture and leadership, and their target markets are all just getting started now. CTV off small base. Programmatic as a whole only 2% of $700B market…a market that is expected to grow to $1T with majority of that spend being done programmatically. Currently at a $2.3B small cap with growth and profitable - and the best is yet to come.

Have a good weekend all,
Dreamer

Rundog999 · February 23, 2018, 6:08pm

For what it is worth, I have a friend who works in the advertising business and has dealings with TTD. My friend says that TTD’s founders are among the smartest people he knows in the business, but that TTD does not offer anything that Google or others can’t or don’t offer. My friend says that his company’s philosophy is to use TTD for the present to help ensure that competitive alternatives to Google continue to exist. However, he says that TTD’s services are high priced and he has doubts that, longer term, customers will see sufficient value to keep using TTD at those high prices.

LifeOfDreamer · February 23, 2018, 6:26pm

In the traditional display and digital ad space, sure.

Outside of youtube, google is limited for CTV.

Google has no impact on their China growth.

Google is awesome company and I invest there too. But this oppty is not a play where google is only competitor. I wouldnt invest in TTD if i thought Google was a long twrm issue.

Phoolio18 · February 23, 2018, 8:42pm

Bear & DreamerDad,

Great back on forth on The Trade Desk and thank you for providing all of your thoughts. I don’t know that I can add to much to the discussion as it seems like the Bull & Bear points have been well described.

Here’s what I can say in my opinion, this company is most certainly worth a medium sized position (for me that is around 5%). There is certainly customer concentration risk. I mean, they only grew customers by 16%. But, those customers control a gargantuan portion of the ad market and 95% of them decide to stay with The Trade Desk. There is also the walled garden risk. No company can compete with Facebook and Google, right? International growth has mitagated that concern to a degree, but it still remains. CTV is the big catch that seems to be on the hook to also help mitigate.

As far as leverage is concerned, GAAP earnings grew 54% this quarter as well on 42% revenue growth. I’m not sure I see the “slight of hand” the company may be playing with leverage. But I’m no financial wizard either.

Back to my simple point, I believe the risk/reward scenario for this company is quite favorable based on the current capabilities and the TAM. The model already displays profitability, cash generation and earnings and they are at the very early stages of their potential. The International and CTV optionality play an important part in the risk/reward determination. I simply believe TTD has the capability to expand tremendously and do so while being profitable.

Of course, a competitor could come along and blow the whole thesis to shreds, but TTD has a big lead.

A.J.

Darthtaco · February 23, 2018, 10:37pm

Pretty sure that most people here would understand when talking about business segments growing so much faster than the overall company that those segments would be building off a small base. Otherwise they wouldn’t be “emerging”. I would include that in goes without saying category.

It also goes without saying that such small but rapidly growing segments are extremely important for such small but rapidly growing companies.

Take the aforementioned segments. I don’t think you can find a breakdown exactly from what revenue to what revenue but they did say that revenue for the three “emergerging channels” Native (200% growth), Audio (600% growth), and Connected TV (535% qoq and 1000%Dec to Dec) generated $100M in add spend on TTd platform for 2017. That’s about 1/15th of the $1.55B in spend for the year. They earned $308M in revenue on that spend for about 20%. So they earned maybe $20M in revenue from these emerging segments. Based on the growth rates it’s safe to say that this small base from 2016 would have been something around $5-7M for a gain of $13-15M YoY. For comparison AYX was just celebrated for a “perfect quarter” where revenue increased $13.7M QoQ. I just started a position with AYX on Tuesday ahead of earnings thanks in large part to this board. I know that’s a year versus quarter comparison but it’s also a 500% growth rate verses 55% growth rate comparison. Both companies also finished yesterday at approx the same $2B market cap.

Connected TV and the ad spend across numerous platforms and apps is just get started and TTD is sprinting into this emerging segment. While continued 500%plus growth is probably not likely, even a fraction of that would start to be a lot of gum balls.

I’m not by any means suggesting that TTD is the perfect investment or I’d be in for a lot larger position than I am. It’s maybe 3%, though I’m strongly considering adding in the near future. But I do think they shouldn’t be dismissed outright either. They look to have some strong growth drivers in a changing field.

RaptorD2 · February 23, 2018, 11:07pm

Sounds AMAZING…but do you see what really happened? Operating Profit was up 22%. They turned 42% revenue growth into 22% operating profit growth, but then through some accounting (paying more SBC and less income tax) showed 64% EPS growth.

Amen, Bear.

I’ve a company or 2 (or 3 or …) on the other side of that scenario, which had truly outstanding results but didn’t bother to shuffle numbers which were realigned due to reporting changes and new requirements to make it easy for analysts and other hat racks to compare YOY change. Needless to say, their stock prices are considerably less now than before they reported, in spite of sales and growth that most companies can only dream of.

Unless one is a trader, either way of dealing with accounting changes sucks. One way looks good now, so the price soars temporarily (time to sell?) and the other way looks bad now (without interpretation) so the price suffers for who knows how long. If I had to choose though, I’d choose the latter. Pay me a little now or pay me a lot more later? Let’s see, I’ll take … pay me more! After all, it’s not like I’m planning on kicking the bucket this week. Not to mention one way is dealing with short-term glory seeking manipulators and one with some sense of an owner’s honesty. Again I’ll take … well, you know what I’ll take if those are the choices.

Still, I admit watching those 5-digit losses almost every day isn’t near as much fun as were the occasional days of 5-digit gains. I need to remember that it always takes longer to climb a long hill than to step off the cliff.

I can look past short-term pain easily enough. It’s tricky management in my companies that would cause real pain. Well, that and my broken neck. < sigh > it’s always something, isn’t it?

One Last thought: I wonder if TTD is hurting Facebook and especially GOOG. Offhand I would guess for one or both, that is affirmative - which means they may not be strong and nimble enough to serve as my port “anchors” any longer. Of course they’re way down on the charts now too.

Told ya, it’s always something.

Dan
nvda abmd anet sq shop algn ipgp mksi tree fb googl payc pypl ma pstg

dumaflotchie · February 24, 2018, 7:52am

Conclusion

The Trade Desk isn’t down and out by any means. They’re still growing…just not as fast as they used to be. They had a fine year, yes. But is this the bargain of a lifetime? A foregone conclusion? A destined long run success? I’m just not so sure.

Bear

Hey Bear:

Before I add a little more color to what DD has suggested, at the NPI, we have pretty thoroughly pursued the “bear” case for this stock that essentially boils down to:

The “walled gardens” of GOOG, FB, AAPL, etc. would make access to customer buying/search preferences more challenging
privacy initiatives would make accessing customers searching and buying preferences more challenging
Their customer base is very concentrated largely to advertising agencies (whereas the GOOG’s of the world do not rely on agencies at all). Therefore, TTD may be subject to buyers power.
They are an early company and their growth rate may slow quicker as they mature just as CRTO did
Programmable advertiser casualties are littered from past failures and the market has doubts about whether TTD is going to be just another failure in a long list (casualties that have been flash in pans…Tubemogul got as high as $22 but fell to $8 when taken out by adobe, FUEL as high as $60 now down to $3. Numumerous other programmatic advertisers debuted over past 5 years including Tremor Video (TRMR), Rocket Fuel (FUEL), MaxPoint Interactive (MXPT), Marin Software (MRIN), and YuMe (YUME). The market ruthlessly damaged their stocks. Millennial Media was bought by AOL at a fraction of its initial valuation and TubeMogul was likewise acquired by Adobe Systems (ADBE) for a fraction of its imitation value.
A downturn in the economy would be felt quickly in advertising.

OK, now we have all those elephants out in the open, let’s go back and add some color to the excellent job that DD already did.

What then is the bull case:

TTD is growing at a rate over double the general programmable advertising industry as a whole (CRTO is growing at just that industry growth BTW)
TTD has a low market cap vs. more established advertisers (compare that to TSLA vs FORD)
SaaS is a clear paradigm shift and it has NOT yet hit mainstream news
The customer retention rate is higher than CRTO and they have surprised revenue in prior quarters to the upside 7-15% and have better margins than CRTO.
They believe they have a massive data base and intelligence that gives them advantages (moat) over new entrants or incumbents:

And so it actually gets smarter over time and getting smarter over time makes it more and more defensible which is part of the reason why we talk about when we ramp up a big customer it takes time, we have to go prove ourselves that after we have all of those learning and we’ve applied the budgets and the data that we have for years and years we think we have such an advantage over a newcomer that we’re going to keep doing that as long as we keep paying attention to it and building the right products and listening to our clients and maintaining our position as a product driven company. But there is nothing that can make this company fail faster than ceasing to be a product driven company that shifts product every single week and that is the core of who we are.

The OMNICHANNEL concept is crucial to their success with their ability to track a customers through all access points from mobile, to connected TV, to any country to any search, audio, video, etc.
They are expanding their customer base to major brands and not just ad agencies…thus broadening their reach.
Their expansion into audio, connected TV, Asia are all designed to go where GOOG, FB, AAPL may be less able to wall off gardens. Therefore, seeing these omnichannel sectors grow at a very fast clip (regardless of the smaller base) are important to the longer term investment thesis and should not be so readily dispelled.
They believe the above listed previous programmable company failures (and their stocks) are a major deterrent to new competitors…the ship has sailed according to them…the resources and historical databases required to compete are simply too great.
They have clearly stated that at this juncture, they are focused on growing market share and revenue growth and place increased profitability as a longer term initiate. At the present growth rate, they should be a $1 Billion annual revenue company in 2 1/2 years…this for a $2 Billion market capo company…does that seem reasonable???
They have a substantial land and grab success history…companies and brands tend to spend more the longer they are with them.
Take a look at these investor slides for a nice organized detail of what they do, TAM, growth rates, etc.:

http://phx.corporate-ir.net/External.File?t=1&item=VHlwZ…

So in summary…as in most stocks, there are threats and opportunities…each of us can weigh these in balance and place your bets where you think this likely goes.

Hope this adds a bit more color to an already colorful discussion.

Best:
Duma

http://www.stockta.com/cgi-bin/analysis.pl?symb=TTD&cobr…

captainccs · February 24, 2018, 9:08am

So in summary…as in most stocks, there are threats and opportunities…each of us can weigh these in balance and place your bets where you think this likely goes.

Hope this adds a bit more color to an already colorful discussion.

Best:
Duma

I was an early bull on The Trade Desk even in the face of Duma’s negatives. When I found out about the client concentration in ad agency holding companies I changed my tune and sold. Asked about new client acquisition Jeff Green said they were concentrating on retaining their ad agency holding companies (which are few in number). This clearly is a weak point for the The Trade Desk as it reduces pricing power and increases risk. I’m not saying The Trade Desk is doomed by any means, buy as Duma says, “place your bets where you think this likely goes [best].”

I checked my wish list for candidates and decided to add to ALGN and TREE:

http://softwaretimes.com/pics/ttd-02-23-2018.gif

There was an additional consideration, market sentiment. There is a lot of distrust in the market regarding programmatic advertising reflected in all the negatives that Duma has brought up. If they are misplaced, in time the stock price will reflect it and believers will make out like bandits. But only time will tell and time is what I’m short of.

But, as you can see from the chart, the earning reports drove TTD up and TREE down even when the LendingTree’s earnings were excellent. One reason could be that the market thinks the stock is overbought.

Denny Schlesinger

LifeOfDreamer · February 24, 2018, 10:17am

Duma,
Great job stating both sides. Agree that the market does worry about the bear case concerns and that the market also sees the bull flipside. I obviously tend to lean to the bull side right now. Have been in this stock since April 2017, but wish I had found it sooner.

I actually got into the TTD stock because in my job at a large IT VAR, I actually have as a client one of the 4 largest ad agency holding companies (the 4 are: WPP, Omnicom, Publicis, and Interpublic). I started getting news feeds on this client and trying to understand their industry better and it was quickly apparent that they were old school (Mad Men) and looking to shift to digital/programmatic, and that this shift was just now happening in real-time (like AWS/Cloud in 2012-2013). Anyway, it is all really interesting to me because it is sort of this cool blend of technology (digital, data mining, BI, AI) in the commercial space but where the end product is all these brands we all know and see everyday. If you don’t really think about it, you don’t notice how much advertising makes the world go round. TV ads, radio ads, newspaper/magazine ads, billboards, mailers, telemarketing…these are the traditional methods. Now it is about my digital footprint indicating my interests and allowing (in theory - we aren’t quite there yet) my every action on mobile, streaming (CTV), digital audio (Pandora, Spotify) to have a more personalized ad experience. On Netflix I rate the shows I watch to help them provide a better recommended list. On google’s news feed I block tons of spam sources, highlight preferred sources, and indicate my interests and have a daily news feed that is much more streamlined and relevant than just blindly surfing major websites. Some people can sweat the privacy concerns, and I get that, but I am not telling them personal family info or giving my credit card number…I just want the big giant messy online world to be more relevant and interesting to me. Nothing drives me crazier than having the commercials/ads I come across be repetitive and uninteresting, whether it is tv, streaming, or radio.

So I welcome our digital and personalized future, even if robot overlords probably come with it.

Thanks for the great write up, and the links to the investor day presos…I posted those on Seeking Alpha but don’t think I did yet here at the Fool. There is a ton of info in those investor slides and I thought they did a great job during that Investor Day last year. It can get a bit technical, but I like that the leadership can get in the weeds…they understand the nuances and have skin in the game, which I like in an exec team. I wish there was an audio recording to go along with the slides from the Investor Day, but I haven’t seen one. Slides are great, but the majority of the info is verbalized in presentations like that. Hopefully the Investor Day is an annual thing, and maybe they have another one sometime after Summer.

-Dreamer

TimWEdits · February 24, 2018, 11:09am

streaming (CTV)
Been following this discussing, thanks all. Am getting stuck on the ‘C’ in CTV though. I understand that it indicates streaming TV, but what does the ‘c’ actually stand for?

Phoolio18 · February 24, 2018, 11:25am

C stands for Connected TV.

A.J.

volfan84 · February 24, 2018, 11:28am

C is connected in CTV.

Hopefully the Investor Day is an annual thing, and maybe they have another one sometime after Summer.

Dreamer Dad, you won’t have to wait that long. Pasted from the link below:
Non-deal roadshow meetings for marketing purposes: Ansys (NASDAQ:ANSS) and Belden (NYSE:BDC) on Feb. 26, Twitter (NYSE:TWTR) on Feb. 27; Trade Desk (NASDAQ:TTD) on Feb. 28; Zynga (ZNGA) and ON Semiconductor (NASDAQ:ON) on March 2.

Stocks To Watch: Investors Recharge After Soothing Fedspeak https://seekingalpha.com/article/4150390?source=ansh

LifeOfDreamer · February 24, 2018, 11:48am

volfan,
Great catch, thanks! I don’t see it on TTD’s web/calendar page, so unclear if this will be something to listen in on or not though.

-Dreamer

PaulWBryant · February 26, 2018, 2:42pm

Darthtaco,

I think this was an interesting and underrated bit of math you did, so much so that I wanted to highlight it:

Take the aforementioned segments. I don’t think you can find a breakdown exactly from what revenue to what revenue but they did say that revenue for the three “emergerging channels” Native (200% growth), Audio (600% growth), and Connected TV (535% qoq and 1000%Dec to Dec) generated $100M in add spend on TTd platform for 2017. That’s about 1/15th of the $1.55B in spend for the year. They earned $308M in revenue on that spend for about 20%. So they earned maybe $20M in revenue from these emerging segments.

But 20M is still a very small number against their 308M of total revenue. If that even doubles in 2018 I would sit up and notice. I think there is basically 0% chance that it grows to 100M or more in the next year or two, and you can quote me on that. And by that time the growth rate will be much slower. Plus (and this was my real point) these fast-growing segments are just offsetting the slowing growth in their much larger segments. Look for overall revenue growth to continue to slow.

Everyone,

Thanks for the interesting discussion on this thread. I remain convinced that the story here is more compelling than the reality.

Bear

volfan84 · May 10, 2018, 5:05pm

Bear, in light of the original post in this thread, I am interested to see your updated thoughts after this most recent quarter.

The Trade Desk +22.1% after solid beat, raised 2018 guidance https://seekingalpha.com/news/3355574?source=ansh $TTD

volfan84
Long TTD

Not intending this as a call-out, but you may have focused a bit too much on the wrong things last quarter, with the small base part as a reasonable point made.

PaulWBryant · May 10, 2018, 7:12pm

Bear, in light of the original post in this thread, I am interested to see your updated thoughts after this most recent quarter.

Unlike Twilio, this is not one where the company performance was what I expected. I am very surprised to see them grow at 61%. I still don’t believe they will keep it up, but I could just be wrong again. Congrats to the longs.

Another random thought: could they have seen a demand uptick throughout Facebook’s struggles?

Bear

LifeOfDreamer · May 10, 2018, 7:48pm

Another random thought: could they have seen a demand uptick throughout Facebook’s struggles?

It was addressed on conf call. Will post transcript later.

Net is more data was bought thru their platform in march than ever before, despite all the concerns on data due to FB.

They believe brands/agencies view digital/programmatic as a primary driver and not just as a supplemental driver, and thus they need to diversify beyond the top search giant and top social network.

GDPR is a good thing for them…they have been at forefront of data privacy for almost a decade.

Biggest drivers continue to be outside of FB and GOOGL grasp, such as intl/china (they bring brands to spend money in china…win-win for china), audio, mobile, and of course CTV.

They executed nearly flawlessly. Again.

Guidance calls for $433m, which is 44% y/y guidance. So assume they beat as usual.

Profitable, positive FCF, growing 60% y/y in latest Q and CTV is in “first inning”.

Very few companies can match that rev growth and FCF/profitabilty when over $400m/yr rev mark.

Dreamer

XMFCochrane · May 10, 2018, 8:58pm

That sounds about right, DreamerDad.

Bear, I would only add that FB had an excellent 1st quarter. If FB is struggling (which I don’t think they are), it has not showed up in FB’s results yet. If more advertising revenue is headed TTD’s way from FB struggles, however, it would first show up in TTD’s Q2 results. Another possible catalyst for TTD if you will.

I really like TTD and its CEO Green. I’m not in it, because I have very large positions in FB and Google and I figure all my money can’t be in online/digital advertising companies. But I readily admit TTD’s upside is much higher. I’m still tempted actually.

Anyway, yes, congrats to all the longs and I would bet on more good days ahead.

Matt
Long FB/GOOGL
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

Phoolio18 · May 10, 2018, 9:49pm

This was an extraordinary quarter for TTD. Can they keep it up? I truly think they can.

Green is incredibly sharp and has attacked the market all while being profitable - really an incredible feat for a SaaS company. I’m careful betting on Green as I’ve put too much stock in leaders in the past. Yet, he seems like the real deal and for that reason it is roughly 7% of my portfolio even in an industry that has been beaten and battered. The walled gardens are the competitors with only CRTO doing anything profitable in the space. Yes, TTD does seem to have it figured out.

Their optionality is fantastic focusing on Asia, CTV and mobile. CTV grew at a “meager” 21 tines this quarter. Yes, I know. Small base and all. Growth anywhere near that will eradicate small bases.

A.J.

creelon · May 11, 2018, 10:02am

Hello Dreamer,

You have covered many of the salient points on the call. One that you haven’t mentioned that I thought was meaningful was Jeff Green’s comment on TTD commissioning a Nielsen report that shows that 41% of the American TV audience NEVER watches traditional TV. Thus, when brands desire “reach” they must turn to programmatic for a significant portion of their spend. He likened it to TV’s early days when brands must buy CBS, ABC, and NBC to get the reach they wanted.

Best regards,

Mike