TTD Stock – How an advertising minnow outgrew the big beasts
The striking rise of The Trade Desk in the fast-moving world of digital advertising is something of a puzzle.
An “adtech” business that sells itself as a neutral platform for managing digital campaigns, it now has a market value that towers over Publicis, Omnicom and WPP, the old advertising empires that it principally serves, on revenues that are a tiny fraction of what the big names earn.
All this in an industry where tech groups such as Google and Facebook have been hoovering up marketing budgets for years and spending has slumped further since the pandemic.
But even through advertising’s year of woe, shares in the California-based company have more than doubled in value since January, giving it a $28.6bn market capitalisation that is bigger than Omnicom and WPP, the world’s biggest advertising holding groups, combined.
Investors such as BlackRock and Baillie Gifford backed the company in a bet on the future of digital advertising. So far it has paid off handsomely. But it remains a leap of faith.
The Trade Desk’s revenues were about $680m in the year to June 2020, little more than 2 per cent of what Omnicom and WPP generated during the same period. “Something has to give!” said one frustrated industry executive.
Rather than a shortlived star of tech speculation, Jeff Green, The Trade Desk’s founder and chief executive, claimed his company is built “to last a 100 years”.
His aim is to provide an efficient way for clients to access and plan ad campaigns in the “open internet”, a fragmented market outside the gated realms of Google, Facebook and Amazon. PwC estimates this market is worth as much as $100bn, covering advertising on websites, mobile phones, podcasts and connected televisions that is bought using automated systems.
“Sometimes in an industry, you create a rough draft, and throw it away, create a rough draft, and throw it away. And that is what advertising has been doing with digital until now,” Mr Green told the Financial Times. “At some point you create a business that is going to last a very long time. And that is what we believe we have done.”
Even after years of trying, he admitted it is still hard to explain the business model to people unfamiliar with the industry. “My mother still has no idea what I do,” he said.
He likens the first company he created, AdECN, which was sold to Microsoft in 2007, to a financial exchange but offering real-time bidding on advertising space, a business that is dominated by Google’s AdX.
The Trade Desk, by contrast, acts as a broker for its 800 buyside clients, co-ordinating data and access to advertising space. In total, through fees tied to spending volumes and data services, the company took about 21 per cent of the $3.1bn of gross expenditure on its platform in 2019.
“Investors have decided that The Trade Desk can grow into its valuation,” said Brian Wieser, head of business intelligence at GroupM, a media buying agency. “And one of the bets is that the take-rate can hold up. Going from 20 per cent of $3bn billings to the same take on $30bn is a serious stretch.”
The biggest groups performing a similar function are the in-house operations of Google, Facebook and Amazon. But because The Trade Desk does not have advertising space of its own to sell, Mr Green argued it is free from conflicts of interest where “you are trying to rip off . . . customers as much as possible without them firing you”.
“What we are trying to do is string together a healthy ecosystem in the open internet, so that all the disparate pieces . . . can compete with [the big tech groups].”
The Trade Desk has won praise for its easy-to-use product and customer service, the bedrock of a business that has been in the black for five years, making a pre-tax profit of $116m in 2019. Mr Green’s 10.7 per cent stake is worth about $2.9bn.
But Ratko Vidakovic, founder of consultancy AdProfs, said that despite the obvious strengths of the company “people in the industry remain baffled by the valuation”.
The adtech groups that were meant to revolutionise the industry with automated, real-time and highly targeted ad buying have mostly come and gone, chewed up by a fast-changing sector and ferocious competition from Silicon Valley.
Even those that have survived — such as AT&T’s Xandr and Criteo — have been affected by tougher privacy rules and new restrictions on the data flows that are the sector’s lifeblood.
Mr Vidakovic said at first it is hard to see The Trade Desk’s competitive advantage. “They have no unique inventory, no unique data, none of the ingredients you would expect a successful ad platform to have.”
What differentiates the business, he said, is its relationships with agencies within advertising holding groups.
“The Trade Desk is a true platform in that it enables the agencies to build their businesses on top of it, not just technologically but financially,” he said. Some holding groups have looked at ways to reduce reliance, but have in the past struggled to develop in-house tech capability.
Laura Martin, an analyst at Needham, said The Trade Desk has “re-intermediated” the agencies as middlemen by offering them volume discounts. Brands have a reason to buy advertising through agencies because it is cheaper, while agencies “do not feel threatened” by The Trade Desk because it is protecting their place in the supply chain.
Mr Green sees two main sources of growth for the company. The first is China. He is “more confident than ever” that The Trade Desk can win market share, even though it is just the kind of US-listed, data-rich tech business that seems likely to rouse that country’s protectionist instincts.
The Trade Desk’s pre-tax profit for 2019
But even more important is internet-connected television, a market that is expected to boom as consumers cut cable and move to ad-funded streaming services, which can use customer data to serve highly targeted ads.
The prize is a potential slice of a global television ad market worth $132bn, according to GroupM. The Trade Desk expects 80 per cent growth in internet TV ad spending on its platform in the third quarter.
While few doubt the market’s potential, some think The Trade Desk might be muscled out by big operators.
“For now The Trade Desk can still buy inventory on Amazon Prime TV, Roku and Hulu,” said Rocco Strauss, an analyst at Arete Research. “But they all have their own demand-side platforms. Amazon will say: come and use my platform and you can layer on all the Amazon targeting data. It is a strong proposition that The Trade Desk can’t match.”
Internet cookies are another challenge. These data files that track people’s website visits have been banned on browsers such as Apple’s Safari and are being phased out by Google on Chrome, posing a fundamental challenge to the adtech industry.
Mr Green is convinced the connected market is too fragmented to be attractive to big players such as Amazon and Google. “You can set the rules when you’re big, but no one in television has that sort of market share,” he said.
As the adtech sector consolidates in a difficult market, Mr Green also said he is “looking at more deals than we have historically” and plays down the prospect of The Trade Desk being sold to a bigger rival.
“If it were to ever join forces with somebody else, they would have to share that value, that this is a play to keep the open internet competitive,” he said. “I said to our first large investor: this is the first thing I’ve ever created that was not built to sell.”