One of my favorite companies lately

Investment Analysis Clubs Saul’s Investing Discussions
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The Trade Desk (TTD) is reporting earnings tomorrow and I’m very excited. Last quarter, the company reported fantastic earnings and the CEO, Jeff Green, said, “nearly everything went right.” I know this company has flashed across these boards before but I think it is being under-appreciated in the grand scheme of things.

I will attempt to make a case for why The Trade Desk should be a good investment and, in advance, I thank you for your opinions as they sharpen my own thinking. If my outline is not convincing, RuleBreakers has already twice recommended it and I believe it has been in the last three Best Buys Now.

If you are not familiar with The Trade Desk, it is a software company that provides an ad-bidding platform for ad agencies. In a nutshell, its technology enables ad agencies to maximize spend through leveraging data. It is called programmatic advertising.

My thesis hinges upon three main points: huge and growing TAM, differentiated business model, and great management.

  1. The yearly advertising market was 652 billion in 2016 and is expected to grow to $767 billion in 2020 (4% CAGR). Within that, digital advertising spend was $205 billion in 2016 and is expected to grow to $340 billion in 2020 (13% CAGR). And most importantly, programmatic was 19 billion in 2016, expected to be 42 billion in 2020 (22% CAGR). This is not to mention that programmatic TV spend is expected to leap from 240 million in 2015 to 17 billion by 2019 (CAGR- a lot).

TAM does not matter if you cannot exploit it effectively and efficiently though. The Trade Desk has been proven to be scalable. First, it is a self-service model so sales and marketing do not make up a crazy percentage of revenue like most of these fast growing software companies. S&M was 23% of revenue las quarter. This allows TTD to spend more on R&D and innovating rather than “convincing” people your product is good enough. I am a fan of self-service, so long as your product is as good as you think it is. With that said, TTD’s revenue expansion rate was over 170% in the last quarter. To put that in perspective, Talend brags about a 120+% expansion rate. So it seems like TTD’s platform is solid to say the least.

  1. The Trade Desk works with ad agencies. The company is very focused on helping these agencies help their clients rather than squeeze a quick buck out of them. Traditionally, ad-tech companies have bought up ad inventory and then re-sold it at higher prices, ad arbitrage essentially. This type of practice certainly does not have your customer’s best interests in mind. TTD is different and simply provides the platform and the tools to enable the best ad spend. Another benefit of this relationship with ad agencies is access to vast amounts of data. These agencies trust TTD so they will plug in their proprietary ad data into TTD’s platform. This, in my mind, seems like a huge long term advantage that TTD may capitalize on in ways I can’t even yet think of.

The Trade Desk is also omni-channel so they do not solely operate in mobile as do some ad-tech companies. TTD is getting into audio and TV which are both growing very quickly.

The Trade Desk is huge on transparency. All they are doing is enabling ad agencies to get the most out of their ad spend. The focus is on the buy side because ad inventory outweighs demand and thus it seems to be a buyer’s market. TTD sees this and is giving agencies the tools to advertise most effectively.

  1. The CEO is Jeff Green and he is one of the pioneers of programmatic advertising. With that said, he owns well over 300 million in stock and I haven’t seen a company with higher Glassdoor ratings. TTD is a 4.8 overall, 98% would recommend and 100% of people approve of Green. Unreal.

As I said, the company is huge on transparency and enabling rather than back stabbing. Management made is known they are in this thing for the long haul and I hope to continue to see this kind of language and action.

Wrapping Up

At a 2.2 billion dollar company, The Trade Desk looks very promising. On top of all this, it is profitable. Unbelievable right!? Revenue grew 78% in the last year to 225 million and net margins were about 12%. Because of a tax break this past year, the PE is only 55 but that may be slightly deceiving. But all in all, a growing TAM, a unique business model and great management make for a promising investment.

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Fish, great write up. TTD is my third holding at present. I have no idea what it will do at earnings other than it is a company that has clearly been a huge winner and I don’t see why this should not continue. As Jeff Green says, his company is successful because it gives more in benefit than it takes in compensation. This can be seen by the 95% client retention rate, and the rapid rate of new client retention, all while being extremely profitable despite being at the land and grab stage of their growth.

Nvidia and TTD reporting tomorrow. Could be quite the disastrous day. Who knows how the market will react to an earnings report these days.

Tinker

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I hope you’re right, Fish. I’ve been studying several high rollers over the last 3 weeks or so and decided that TTD looks pretty tasty so I decided to buy a full chunk before earnings and put in some one-cancels-all limit orders last night since I’ll be out tomorrow a.m. Unless it shoots up on the open, I will own TTD tomorrow. The only question is at what price, and if it’s as successful as I think it will be, I don’t care at all about a few nickels per share, I just want them in my bunker.

Nothing TTD does seems to be totally new, except no one’s put together so many facets of targeted advertising all in one package with so many benefits to their clients (and their ad budgets.) The days of take-it-or-leave-it-and-hope-it-works advertising will soon be history and TTD looks to me to be well-positioned to lead the charge. Mobile, desktop, tv, radio. Why have so many companies limited their target market to any single niche? Oh well, too late now. Eat your heart out. TTD has them all.

Go TDesk

Dan

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Hi Fish,
Thanks for the nice write-up on TTD. I started a little position at the end of May at about $52 and sold two weeks later at about $51. There was absolutely nothing wrong with the story. That wasn’t the problem, it’s just that I’ve had such bad results with these ad companies, Criteo (CRTO) being a good example. They all get recommended by one or another of the Fool Services. They all sound great. But they go nowhere. (Critieo hit $53 in 2014, and in 2015, and was $54 something earlier this year, and is now at $50, after rising a dollar yesterday from $49. They play in a tough neighborhood, and they each have a ground breaking new approach when they come out, but then someone new comes along. And they also have giants on the playing field with them like Google and Facebook. Not to discourage you, but don’t put all your marbles on it.
Best,
Saul

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Saul, you make a very good point, which we run into in general with investing - “There’s a lot of money to be made in X, but the trick is to find the companies that are actually making that money.”

One example would have been cars in, say, 1910 or 1920. Some car companies went under without ever making much money, despite showing promise at one time. Others got acquired at a nice premium by a company like GM. If I remember the name and story right, the parts company GPC (the underlying company for NAPA) has done well for many decades, and is probably still a good investment.

If TMF had been around way back then, they probably would have recommended GM and Ford, maybe some parts companies, several car companies that ended up failing, and several that got acquired. And if you had bought everything they recommended, you probably would have eventually come out pretty far ahead, but with a bunch of bumps in the road. And if you had figured out for yourself (like Saul) which companies to avoid or sell early, you would have done even better.

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If I remember the name and story right, the parts company GPC (the underlying company for NAPA) has done well for many decades, and is probably still a good investment.

I would be cautious on buying a company in the auto parts market for the same reason why I would be cautious about buying a company in the fossil fuels energy market. There is a transition happening and it will accelerate. The world is transitioning to clean renewable energy and to electric cars. Electric vehicles don’t require as many parts replacement over their life (and their life is also longer) as ICE vehicles do. I don’t like to invest into markets that are not growing or declining.

Chris

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and if it’s as successful as I think it will be, I don’t care at all about a few nickels per share, I just want them in my bunker.

Well, famous last words … that worked out great … and it matches the red for the rest of my portfolio today. :frowning:

http://schrts.co/Zmjnbz

Dan

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I also hold TTD as a small allocation but the biggest challenge for them is that FB and GOOG control almost 90%+ of the digital ad spend so the TAM for TTD is effectively very small unless they can expand this thru things like radio and TV space.

I also believe that with Google also trying to squeeze advertisers on Chrome etc we may have even more constraints

Need to see how it play out.
rajesh

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