This week’s posts are focused on equity research (we will resume macro analysis next week) and are public to all. These notes were compiled by Staff Analyst Tim Chang and are meant to be a brief overview of the comprehensive research done on recently initiated coverage.
The Trade Desk is a technology company focused on buyers of advertising. Through its self-service, cloud-based platform, ad buyers can create, manage, and optimize more expressive data-driven digital advertising campaigns across ad formats and channels, including display, video, audio, in-app, native and social, on a multitude of devices, such as computers, mobile devices, and CTV. The Trade Desk’s platform maintains integrations with major inventory, publisher, and data partners provide ad buyers reach and decision capabilities, and its enterprise APIs enable its clients to develop on top of the platform.
The company commercially launched its platform in 2011, targeting the display advertising channel, and has since added additional advertising channels. The Trade Desk’s clients are primarily advertising agencies and other service providers for advertisers, and the company generates revenue by charging clients a platform fee based on a percentage of a client’s total spend on advertising, while also generating revenue from providing data and other value-added services and platform features.
Since its IPO in 2016, it has seen an average annual revenue growth of 43%, maintaining operating margins between 10%-28%.
As a leading technology platform provider in the digital advertising sector, The Trade Desk is well-positioned to benefit from the sector's expected growth. The digital ad market is forecasted to expand by 7.3% annually through 2027, driven by an increase in digital content across various devices, including mobile and connected TV. In addition, we view the recent announcement from Netflix (as well as Disney+) that the company plans to offer an advertising-based tier as a major catalyst for advertising growth, which has lacked scaled “high quality” programming to date.
The Street is projecting average annual revenue growth of 22% over the next five years, primarily fueled by connected TV ad spending and international market expansion. The Trade Desk faces several risks, including its dependency on the broader economy and consumption trends, which can significantly impact its revenue. It also confronts formidable competition from Google, which holds a dominant 40% market share in the digital ad space.
Additionally, the firm is navigating challenges like privacy regulations, Apple’s privacy policy changes, and the phasing out of third-party cookies by Google. There are also inherent risks associated with data privacy and security, especially concerning UID 2.0, an identifier based on email addresses.
Management also called out macro pressures as driving the weakness in the 4Q guide, particular in the consumer electronics, autos, and media and entertainment verticals (latter two a result of recent striking). 4Q outlook implied a top-line growth deceleration of ~680bps.
The Trade Desk's capital allocation strategy has been conservative, with only two minor acquisitions in recent years. While the firm has historically not allocated capital to share repurchases, it approved a $700 million buyback program in Q1 2023. Capital expenditures have averaged 6.3% of revenue in the last three years, with a focus on maintaining and enhancing its platform.
The recent share repurchase program and the company's ongoing efforts to improve its platform and expand its market presence bolsters the case for adding TTD to the watchlist. We believe the current valuation of TTD has already priced in expected future growth and would revisit the stock if TTD sees a sustained pullback in price or margin expansion.
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