Why I sold out of TTD

Investment Analysis Clubs Saul’s Investing Discussions
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Last weekend TTD was ~13% of my holding, this weekend its 0%.

Here is simple reason - it reported revenue growth rate of 41% where i was expecting something in 50s%… more importantly, the call did not address this drop, and even more importantly, the investor presentation posted projected 35% growth next year…

Is 41% bad? not in isolation… but it is >10% drop… and it matters when valuation is high…

will TTD continue to grow as a company? I believe so… I believe it may continue to grow in 30%s and 20%s for a long time to come… and that will help it “grow into” its $8.6B market cap it fetches today…

question to me is not if the company will continue to grow OR even if stock price will grow… question to me is - do i expect market to pay much higher price than here 12 months from now? or 2 years or 3 years… whatever the window one looks at.

Based on the reduced growth rate, that expectation for me have changed with this earnings call.

Now before you accuse me of stupid numbers focused guy, let me also explain my thoughts of qualitative challenges with this company.

  1. It is not a number 1 in the market and unlikely every will be. Google and Facebook are not going to be falling in TTD lap anytime soon.

Why is this important? Because it brings the headroom down significantly.
In business world, they describe this as difference between TAM and SAM.
TAM = Total Available Market
SAM = Serviceable portion of the Available Market.
(think of Burger King as restaurant… TAM will be all restaurant biz but SAM will bring it down to only fast food biz).

Now I knew this before the call and still had large holding - thats because it is harder to understand the SAM of TTD’s market. And the reduction in revenue growth rate tells me that the SAM is lower than I thought based on last 4 quarters growth rate.

Now - I recognize that TTD is driving many more initiatives to continue to grow… they talked a lot about growth in Europe and launching China etc. And that all is good… but thats what will take them to grow at 40%s and 30%s for next few years… it is not clear to me that those initiatives will take growth rate back to 50%s…

  1. CCTV, HULU and such: You just need to contrast TTD report and market reaction to ROKU report and market reaction.

Point is CCTV may be lower value market for TTD because companies like HULU, ROKU and others have various ways to monetize their inventory, not just programmatic ads.

  1. Large portion of TTD business is sourced via 4 large agencies… they may or may not become risk to TTD but this has been continuous concern to me.

To be sure, I would be very interested in buying shares of a company growing at 40% or even 30%, but at a price that would be promising to see gain for my holding… at today’s price, with such large drop in revenue growth, I am out of TTD for now.

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Here is simple reason - it reported revenue growth rate of 41% where i was expecting something in 50s%… more importantly, the call did not address this drop…

Thanks nilvest, for presenting such a clear argument for the getting-out point of view. I too was surprised that no analyst asked a question about the drop in growth rate. On the other hand, all six analysts who acted, acted by raising their target prices, and most by $25 or $30, so I wonder what they are seeing that you are not. I personally, in deciding to stay, was responding to the CEO’s enthusiasm, which seemed very genuine, and I didn’t see any business crisis such as we saw with Nutanix. We’ll have to see what the future brings.
Saul

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Based on one quarter report and sell out a platform company is very harsh. Business has up and down naturally. This is not a bad report just not meeting high expectation, plus trade war drop.

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I get that many in here invest solely looking at quarterly growth rate. A business will have accelerating growth in its early stage as it gets off the ground. When it does in a noticeable way, we get in. When one thinks it enters in a later stage of its growth, many bail.

Sometimes the expansion is not linear quarter to quarter and the expansion or contraction of growth may be misleading. Look at SHOP. Many sold out because ‘the growth came down from above 70% to 50%’. What does that mean in the longer term?
what has the stock done? it went a bit sideways for a few months and then continued its ascent. It is not done. Certainly you could say during the few months it went sideways you put your money into ‘better opportunities’! Really? That was last fall when the market went down and the SaaS stocks discussed here went down harder. They did bounce back since the beginning of the year and SHOP went up even faster than several.

So what is it with TTD? what is going on with its business? is the recent lull a buying opportunity or the end of its ‘greatness’? what is the mechanics of all that? the numbers move up and down but what is behind that, and what is that leading it into the future?

Certainly the numbers are a result of something but sometimes it does not tell everything, does it?

tj

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thanks Saul, qwsong and thejusticier for shairng your thoughts.

For sure the quarter was not bad, they beat their guidance, though much smaller beat… and I dont believe they have any execution issue… on the contrary they are probably at their best and still dropped the revenue growth… thats my concern.

Also, if i thought it was one quarter here and there, I would absolutely not budge… I still have some SHOP left (reduced quite a bit due to huge price ramp lately). I am steadfastly hanging on SQ (sometimes questionable but time will tell)… and so on.

It was the realization that my nagging concern about this company - head room in its market - may be coming true. That while they keep showcasing such a large large TAM, in reality, what they can get out of that large TAM may be much smaller piece than their past success may indicate…

One way to think about it is - they charge 20% fees for using their SW to essentially better match making (between audience and advertiser)… so they are akin to a market place… not too dissimlar to say Amazon.

Now think about it for a minute - are they Amazon or Shopify or Etsy of the adworld? Meaning can they really address that huge worldwide retail business like Amazon does OR would they be service provider (like Shopify - very profitable biz, but probably much lower headroom) or a boutique shop like Etsy.

All I am saying is that we may all think this is going to be Amazon of ad marketplace but it seems to be a lot like Etsy of market places… very good biz, very profitable, just dont expect it to be an order of magnitude lager than here because piece of the market they address probably has much lower ceiling…
And the price market is paying today seems to ignore this high probability.

Another reason I believe its more akin to Etsy is that they are able to charge 20%… that is huge portion of any transaction… and that can work only in a boutique, unique space. I havent looked at lately but I would think Amazon is charging a third of what Etsy is charging to any retailer on its platform… and neither are charging in double digits. So TTD has to be a boutique of boutique in its huge huge market… even if they find additional niches to serve to re-amp growth rate, they may not find any space near as profitable of what they are currently servicing. (BTW Green said this on the call that it kills him to deliver positive EBITDA rather than reinvesting or spending on M&A… which kind of supports what I said above).

So bottomline, I dont think they are going back to 50%s of growth rate… and I worry they are actually going into 30%s growth rate sooner than most people expect. That combined with current price / PS is why I exited.

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Nilvest,

The best any of us can do is understand how and why we make decisions based on the information we gather and how it matches the conviction in our investing thesis

Most importantly, you are out of TTD, what did you decide to do with that cash? What about that decision gave you more conviction?

Thanks again. Understanding decision making is very helpful to this board.

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Thanks JAF… haven’t decided on where to reinvest yet.

What looks interesting to me is ROKU - despite strong run up.
It has become 7%+ of my holding and gained 48% on my purchases.
But their earnings looked like they are taking off.

Part of it is - I am catching up on barrage of earnings and updates.
Will share when I make the call.

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ome thoughts on TTD:

Yes, there is concern of slowing growth despite apparently having the best neutral DSP and really tiny marketshare. Another thing I noticed is that the walled gardens are growing faster than the growth of digital ad market (17%). This only means that the non walled garden market where TTD operates is growing slower than the digital ad market. Clearly, that is contrary to what Green says that walled gardens will ultimately have to crumble. They are clearly growing bigger and occupying a bigger slice of the pie. It is true though that due to its faster growth TTD is occupying a larger portion of that non walled garden space. Also, apart from CTV Green rarely talks of the N American business growth.

While I see the above as yellow flags, I see the following positives:

  1. Their unified ID is a moat as it gets them into all header bidding - see answer to the 2nd qn
  2. CTV which grew 3X yoy is becoming materially larger. Green said “We now have hundreds of advertisers spending over $100,000 a month”. So, at the minimum that equates to a take amount of $6M out of the $121M. It could be $18M if he had 200 advt spending $150K/month
  3. Reason why Germany’s premium content provider RTL went with them TTD over youtube for example
  4. Their outside in approach in China can work. They are trying to show BAT companies that they can increase their ad $ by attracting more $ from western brands. If this approach works they will be the only company that can tap into china.
  5. Programmatic ad buying is considered as part even during TV upfront
  6. Also, some talk of acquisitions for more growth.

Finally, the ad business seems quite complex and Green seems to know what he is doing. Because of all of these reasons I continue to hold.

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I can’t take Green’s hype. He spends more time talking about nonexistent business or business that’s a very small percentage than the actual business they are in.

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TTD is still a 10% holding for me, but Green’s hype does bother me. The comment that sticks in my mind was the “this is the most bullish number we’ve ever shared.” What other CEO uses the word “bullish”? It just rubs me the wrong way to use market lingo when talking about business prospects.

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My take on TTDs future is that they will grow as fast as the advertisers take them there.

They’ve grabbed many of the major players, so now the question is how much and how fast will those players increase spend.

Let’s think about the pieces in play

  1. Increasingly connected devices providing increasingly granular information from an increasingly growing number of providers
  • advertisers want the data so they can target the ads, but do they really want to figure out all the ways to connect to all the things? I doubt it.
  • the new emerging connected devices aren’t large enough to build their own walled gardens (more on that below)
  1. Increasing distrust in large corporations.
  • like it or not, this is the drum beat of the last two years. Facebook,Google, Amazon all being attached for how they use personal information to monetize business.
  1. Increasing options to reach audiences outside of the pricing power of the big 3 and traditional cable
  • the movement to a streaming and apps society will continue to reward the latest and greatest innovator
  • often these innovators are hyper focused on a single niche (see Roku, Netflix as examples)

The Trade Desk provides a prism to converge across these trends.

The real question - to me - is how quickly and how fast do advertising dollars move from blunt to surgical instruments.

While many have pitted Roku vs TTD…which isn’t entirely for as Roku is moving based more on number of users and time spent on the platform than revenue growth ala Netflix…the more Roku wins the more TTD wins because streaming is the headwind we are betting on. Disaggregation of devices, disaggregation of time based entertainment, and personalization of how we entertain ourselves is the emerging economy we are in.

Trade Desk caters to landing advertising dollars to a personalized audience independent on when and how they view content.

I hold TTD at 10% of my portfolio in 4th place…and I don’t see that changing anytime soon.

To those tired of Jeff Green having a vision and selling his vision…how else do you lead people?

He built it. He owns it. He’s driving it. You are either on board or off. But I’d be worried if he wasn’t selling. He’s the CEO. He’s the pacesetter.

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JAF,

The reason I would like to see Jeff Green talk a little more about challenges and trends in programmatic spending on desktop and mobile is to see what trends he is seeing in where the bulk of his current revenues are. He talks about CTV growing fast, along with certain other segments of his business, but fails to break down the numbers. To me that’s a big danger sign. Is he pulling the wool over our eyes? He throws out stats like over 100 customers over $100k in CTV but does not remember what timeframe that stat is valid.

So my question is, does he require breaking down the walled gardens and selling to GOOG and FB, which to me is a pipe dream, is he having issues getting inventory on mobile or desktop, are his customers having success there. What is the ACV growth rates, we see they have 95% renewals, which is great. But are current customers growing. Where does he see opportunity with what his current bread and butter is and a little more color there is all.

Quite frankly I don’t want to hear so much about what “could be” but “what is.”

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…and I didn’t see any business crisis such as we saw with Nutanix.

Saul, to compare your reaction to the slowed growth at TTD to your reaction to NTNX’s much more disastrous quarter (business crisis as you mention) doesn’t seem like the right comparison. It would seem to me much more appropriate to compare and contrast your reaction to the slowed growth at TTD to the slowed growth at SHOP.

Not questioning why you did either (kept TTD, sold SHOP), you explained both at the time they happened, and I know sometimes it appears you act on intuition about the companies you invest in, along with the news/numbers, but was curious when looking at those 2 actions together, why a lesser drop in SHOP growth rate (at least in a single quarter) resulted in a sell and a greater drop in TTD growth rate resulted in a hold? Or was it just other factors (as I realize there are many, not just rev growth) of the 2 companies at the time, taken in concert with the growth rate change that resulted in different reactions to similar growth story changes?

And no answer is also a completely valid response if you don’t even remember all the details about the SHOP action as I think it was maybe a year and a half ago. I certainly wouldn’t remember, but I know you keep pretty robust notes of your actions.

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Not questioning why you did either (kept TTD, sold SHOP), you explained both at the time they happened, and I know sometimes it appears you act on intuition about the companies you invest in, along with the news/numbers, but was curious when looking at those 2 actions together, why a lesser drop in SHOP growth rate (at least in a single quarter) resulted in a sell and a greater drop in TTD growth rate resulted in a hold? Or was it just other factors (as I realize there are many, not just rev growth) of the 2 companies at the time, taken in concert with the growth rate change that resulted in different reactions to similar growth story changes? And no answer is also a completely valid response if you don’t even remember all the details about the SHOP action as I think it was maybe a year and a half ago. I certainly wouldn’t remember, but I know you keep pretty robust notes of your actions.

Foodles,
As I remember, there were several issues. As I remember (it was a long time ago), Shopify was having small drops in growth rate every quarter, as would be expected with size, while Square was having increases in growth rate in each of those quarters (in pretty much the same or closely related fields). Then, the quarter that I, and others, exited, the economy posted a huge rise in GDP and consumer spending, and instead of Shopify responding, they had a huge drop in growth rate.

In fact, I found the sell-out in my August monthly summary. Here’s what I wrote:

I had reduced my Shopify position gradually over a couple of months but it was still one of my major positions. However, in early August I sold out of it in shock when their rate of revenue growth, which had been falling every quarter, precipitously fell in a quarter when the economy was very strong and in which Square, in a market quite similar, had huge results, following on top of increasing rates of growth in all the quarters where Shopify had falling rates of growth. My average sale price for Shopify was about $145, about 537% of my initial purchase price which was $27, two years before.

Here’s the way I see it:

In the Mar 2018 quarter the rate of growth dropped 7 points from 75% to 68%. 7/75 is 9% so the rate of growing dropped 9%.

In the Jun 2018 quarter the rate of growth dropped 13 points from 75% to 62%. 13/75 is 9% so the rate of growing dropped 17%.

That’s when I got out. Since then, the rate of drop instead of slowing down as it moved toward zero, has continued to accelerate each quarter:

In the Sep 2018 quarter the rate of growth dropped 14 points from 72% to 58%. 14/72 is 19% so the rate of growing dropped 19%.

In the Dec 2018 quarter the rate of growth dropped 17 points from 71% to 54%. 17/71 is 24% so the rate of growing dropped 24%.

In the Mar 2019 quarter the rate of growth dropped 18 points from 68% to 50%. 18/68 is 26.5% so the rate of growing dropped 26.5%.

That’s enormous and consistent. What’s holding it up is speculation about cannabis, not anything that is currently improving. Not for me.

Best,

Saul

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Tailwinds Jaf, tailwinds :slight_smile: Unless we’re landing a plane, then we want headwinds.

As for Jeff Green’s salesmanship, remember he used to be a broker and worked in/with the stock market. So lingo such as ‘bullish’ would be second nature to him. However, the opaqueness of CTV is nothing new. We have been saying it for months that it is very Talendish, but have largely ignored it because of the consistently great numbers.

Remember when he says 100s of customers spending 100k a quarter, TTD revenue will be 20% of that. So that’s 2 million for 100 customers. Let’s allow Green to have correct grammar and keep his salesmanship - this means ‘hundreds’ is a minimum of 200. So that’s approx 4 million a quarter, or 3.3% of revenue. One year ago, it would be 1.1% of revenue. It’s becoming less and less insignificant, but not quite moving the needle just yet.

CTV is a very young industry. They literally just started! Yes 12,000x growth is hyperbole, but he was excited that they were actually selling. It’s like opening up a cake shop, and trial selling 2 cakes to friends to see if they liked it, they did, so you have the grand opening and suddenly you’ve sold out. It works, you’re excited! Better than expected. So you go back to the drawing board to work on expansion, but of course you’re not going to get that same first day expansion rate.

Just to add a bit of colour and fun, although pretty meaningless as they’re my made up numbers. Here’s a table comparing CTV growth and 200% vs revenue growth at 40% into the future. CTV will become 10% of revenue towards the end of 2020. Note, please, I do believe the 200% projected that far is massively unrealistic. I originally decelerated it faster to 100%, and 10% would then be reached in 2021.


	 Revenue	Growth Rate	CTV Estimate	Growth Rate	% of Revenue
March 18  86		                1		
June 18	  112		                2		
Sep 18	  119		                2.6		
Dec 18	  161		                3.5		
Mar 19	  121		                4	           300.00%	3.31%
June 19	  156.8	        40.00%	        6	           200.00%	3.83%
Sep 19	  166.6	        40.00%	        7.8	           200.00%	4.68%
Dec 19	  225.4	        40.00%	        10.5	           200.00%	4.66%
Mar 20	  169.4	        40.00%	        12	           200.00%	7.08%
June 20	  219.52	40.00%	        18	           200.00%	8.20%
Sep 20	  233.24	40.00%	        23.4	           200.00%	10.03%
Dec 20	  315.56	40.00%	        31.5           	   200.00%	9.98%
March 21  237.16	40.00%	        36	           200.00%	15.18%
June 21	  307.328	40.00%        	54	           200.00%	17.57%
Sep 21	  326.536	40.00%        	70.2	           200.00%	21.50%
Dec 21	  441.784	40.00%    	94.5	           200.00%	21.39%
March 21  332.024	40.00%   	108	           200.00%	32.53%

SHOP:
Hi Foodles, just from my memory I don’t believe Saul sold out after 1 decelerating quarter of SHOP. The deceleration was occurring over several years. Growth in 2014 was over 100%, decelerating to 95, 90 and then finishing 2017 at 73%, before ending up in the 50% growth range in 2018.

TTD, on the other hand, has been lumpy between 40-75% growth. There’s not really been a steady trend like shopify had shown. One concern as 12x mentioned, Q1 is typically their blow-out quarter, but nothing was mentioned about its relative poorness in the CC.

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Ben,
Green said $100k/month not /Q. So, CTV rev is 3x more this Q than what you projected.

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The second part of your question – or I’m sorry the first part of your question on connected TV, I’ll just remind everybody that we announced 3X year-over-year growth on spend and 3X year-over-year growth on inventory. We now have hundreds of advertisers spending over $100,000 a month. I think that’s right. A month, that’s right.

Paul Ross

Over the last quarter.

Jeffrey Green

Over the last quarter, okay. I cannot remember the time frame.

Good to have a CFO very quickly correct you. Someone on this board wasn’t particularly happy with Green’s slip here but oh well. And just to reiterate here, that’s spend. So taking 20% from that, assuming that’s still the cut TTD takes, gives the actual revenue.

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Ok, when I heard it I took it to mean as $100k/m and the CFO clarified that rate was just over the last Q. But I see that it may very well be $100k over the last Q as well. I agree regardless it is still small numbers. Hope they will start breaking it out better for us rather than part of QA.

Also, over the next few Qs it would be useful to monitor the growth of overall digital ad market vs growth of fb, googl, amzn ads, and roku. This will help us understand if the non-walled garden portion of the digital ad market is rising or shrinking. This Q it shrank as the walled gardens grew faster.

If you look at this survey and the list of largest digital ad sellers in the table it appears that the non walled garden market is only about 20%-25%.

https://www.emarketer.com/content/global-digital-ad-spending….

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Hope they will start breaking it out better for us rather than part of QA.

To my knowledge, they have never broken out the revenue for any individual channel in their entire history.

It may be prohibited by the bylaws of the board for all we know. But most companies don’t give specific breakdowns of individual products or markets. It happens but it’s not the standard. Breaking out revenue in granular fashion usually leads to as many questions as it answers.

I would not hold my breath for the CTV breakout.

Darth

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Interesting point Darth. They make such a song and dance of CTV, and to not break it out…!
They do regularly point out that mobile is roughly 45% of spend with TTD - that’s steady for the past year. But sure, they don’t break out individually mobile in-app, web, video. I looked at my notes and it looks like I tried to work it out, but it’s such a mess I don’t understand it, woops!

They normally give:
Mobile as % of total spend
Mobile total growth rate
And individual growth rates of each channel. So taking a couple quarters of information, possible to work out real numbers.