Ad-supported stream growth of trading desk remains undervalued (NASDAQ:TTD)

Trade Office (NASDAQ:TTD) is one of the leading providers of technology platforms for advertisers and advertisers to buy digital ad inventory. TTD is quickly becoming the key independent marketplace for entities other than giants like Google (GOOGL) (Google), Meta/Facebook (META)and Amazon (AMZN) that have the ability to develop their own advertising platforms and also serve the market, as is the case with Google’s DoubleClick. Trade Desk looks set to remain an important independent market, and also one that could benefit from the growing ad market for streaming services offered by traditional media producers as well as Netflix (NFLX).

Trade Desk’s business model is to help ad buyers buy and manage advertising campaigns in the digital marketplace. As such, it should benefit from continued growth in digital ad spend. commerce Desk does not own any media or websites that serve ads, unlike its main competitor in this market, Google’s DoubleClick, which serves third-party websites and content creators, as well as its own websites, such as be YouTube and Google Search. Similarly, Amazon has its own advertising platform.

Trade Desk is the leading independent marketplace and a key choice for entities that don’t want to provide companies like Google and Amazon with valuable data about their advertising. This would include things like awareness of products that are gaining traction and interest from consumers and could allow a company like Amazon to enter that market and subsequently promote their own competing brands.

The Commerce Bureau’s client base continues to grow over time as the Internet grows, as well as the addition of ad serving on many previously non-commercial streaming services. Similarly, TTD’s revenue per client/customer continues to grow over time and has nearly tripled over the past five years. This growth appears to be based on several factors, including increased digital campaign spend, but also the ability to improve TTD.

One of the key capabilities developed by The Trade Desk is similar to what Meta and Google had to develop following Apple’s ( AAPL ) decision to initiate privacy policies that substantially limited third parties from recognizing any personally identifiable information from iOS users. These big players had to develop solutions to facilitate their own user identification capabilities. The Trade Desk’s development of its proprietary user identifier, UID2 (or UID 2.0), was an expensive initiative, but one that places it among the few independent entities with such a capability. Most competitors with such capabilities are in the mega-cap technology space, such as Google and Meta.

Trade Desk continues to grow, and in the second quarter of 2024 it reported about 26% higher sales than the same quarter last year. Additionally, TTD’s third-quarter outlook anticipates a similar level of year-over-year growth. A key component of TTD’s revenue growth this year is advertising on streaming services.

Trade Desk has developed partnerships with many major production houses and streaming services, including Disney ( DIS ), Netflix and NBC’s Peacock, as well as newer digital streaming companies such as Roku ( ROKU ). Some of these services did not initially include ad-supported streaming, such as Disney+ and Netflix, but have added those options in the recent past and are seeing growing subscriber bases for their lower-priced ad-supported options.

Because these companies offer premium content, their growth is likely to produce higher-than-average ad prices for TTD. This should mean that TTD’s revenue per client will continue to grow, as advertisers are likely to select higher-cost ads and higher-quality programming that have been added to The Trade Desk’s inventory from these premium streaming services. This should result in increased revenue growth and potentially increased margins as well.

While it’s difficult to project future margins on a subset of ad inventory, what’s clear is that ads placed within video streaming services like Netflix and Disney+ are more likely to include viewer, or at least household, details. This factor makes those ads more valuable. Similarly, these apps are a key driver of usage and growth in the connected TV market, which continues to take share from traditional broadcasting. Additionally, because of the real-time targeting of identifiable high-value leads or their households, Connect TV marketing is more profitable for publishers and companies like TTD, who estimate Connect TV CPMs to average around $20 over time what traditional TV has a CPM of $10.

Other reasons advertisers are likely to prefer connected TV advertising over premium streamers include cross-device attribution, which leads to clearer data on impressions delivered, as well as frequency and, in many cases, video completion rates . Currently, the total digital media advertising market, excluding search and social media, is approximately $135 billion, while traditional linear television ad spending is approximately $160 billion.

In the next few years, this digital market is likely to overtake the traditional one. This should be due to both the growth of streaming audiences and especially premium ad-supported streaming services, as well as the higher average cost per view for these targeted ads.

Given that TTD last reported revenue of $585 million and that it expects to generate $618 million or more in the third quarter, TTD will effectively bring in as much revenue in these two quarters as it did in all of 2021. Although this growth rate is unlikely to sustain a long period of time, even if we place a conservative growth rate of 10% on TTD’s revenues over the next five years, its revenues would be over 3 billion dollars annually.

However, TTD grew by around 23% last year and seems to have the ability to grow its earnings by close to that level over the next couple of years. If it can sustain 20% growth in each of the next two years, that would add essentially as much revenue as the company totaled in 2021. Additionally, TTD has reasonably strong profit margins, on which should be able to maintain them or even potentially. growing due to higher-value, ad-supported premium streaming. Last quarter, TTD achieved adjusted EBITDA of approximately $242 million, resulting in a margin of 41%. If TTD’s growth and margins can sustain such forecasts, which may be conservative, the company can then be revalued at over $200 per share, or essentially double.

Technology

Shares of TTD appear to be on the verge of breaking out of a trading range that the stock has remained in for most of 2024. That trading range has basically been between $80 and $105 per share. The stock spent most of the last few months at the top of this trading range, but fell to support in early August. The stock has since returned to upside resistance and looks set to break out of this range soon.

If TTD stock can move higher from here, it is also quite likely that a level around $100 will become support. This is primarily based on the fact that the stock has remained in a tight trading range around $100 for most of the summer, aside from a brief time spent testing support in early August. If the stock were to break down from here to $90, then TTD stock could retest support around $80, but the more likely move here seems to be to the upside.

risks

The risks of the commercial office include that it faces competition from larger and highly competitive companies such as Google and Amazon. Google’s DoubleClick remains the largest platform for serving ads on websites, and Amazon’s capabilities should not be underestimated. Beyond competing for business, these mega-cap entities are also able to undercut advertising prices and possibly sustain an extended period of losses in an effort to fend off competition. However, current government scrutiny indicates that these companies are unlikely to do anything so dramatic in the short term as to eliminate competitors like TTD, and may actually be forced to reduce their competitiveness in the future.

Another concern is that some of its larger partners may develop their own in-house capabilities. The biggest such concerns would be from entities like Disney and Netflix, which offer premium content that requires advertising at higher prices. Similarly, such partners could be attracted by a new competitor that offers them better prices. Such outcomes seem unlikely in the short term, but this landscape is subject to change at the pace of technological progress.

Conclusion

Trade Desk is the leading choice for an independent advertising marketplace and one that has entered into valuable partnerships with some of the larger and higher quality streaming content providers. Google’s current government control makes it unlikely that DoubleClick will be able to thwart competition like TTD. Google may even be forced to come to an agreement where it becomes less able to maintain its dominance of the digital advertising market. Similarly, Amazon may be stifled by becoming too strong a competitor in this space.

Premium content providers seem to prefer working with TTD over companies like Google and Amazon, as they are also competitors. As a result, it appears that TTD’s likely revenue growth, and particularly from ad-supported premium streaming services, is underappreciated by the market. The trade desk’s valuation should appreciate as the market comes to recognize the strength of TTD’s platform and the partnerships it has recently forged.