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Bear of the Day: The Trade Desk (TTD)

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The Trade Desk (TTD - Free Report) is the $9 billion digital advertising disruptor who created the most popular new technology platform for companies and agencies to bid for eyeballs on the Internet and connected TV (CTV).
 
I call The Trade Desk "the CME of advertising" because it has been their express goal to build an algorithmic trading exchange for digital advertising as they seek to capture a bigger share of the $750 billion global ad market. In any given minute, thousands of auctions can take place over digital real estate across the web and OTT (over-the-top) pipelines like Roku (ROKU).
 
In the jargon of DSPs (demand side ad platforms), they call this automated, algorithmic model "programmatic" ad buying.
 
TTD is a self-service, cloud-based platform where ad buyers create, manage and optimize data-driven digital advertising campaigns which includes display, video, audio, native and social, on a multitude of devices including mobile. One of the key disruptive features of the TTD model is that advertisers now have much more data at their disposal to target specific audiences and see what's working.
 
Last Quarter Overshadowed By COVID-19
 
Before the company's Q4 "beat and raise" report on February 27, TTD actually saw one estimate bump to $4.16 for 2020, taking the full year from $3.77 to $3.82. Since then, the Zacks consensus has fallen to $3.67, for flat annual growth, on global pandemic worries, especially as TTD was expanding aggressively into China and European markets.
 
And that's why TTD is currently a Zacks #4 Rank Sell.
 
But longer term, this is a powerful story of technology disruption in a market that CEO Jeff Green sees growing to a $1 trillion TAM (total addressable market) in the next five years. Within that massive market, TTD is growing at nearly 30% and shaking the tree of digital behemoths like Alphabet (GOOGL - Free Report) and Facebook (FB - Free Report) as well as TV incumbents like Comcast/NBCUniversal (CMCSA - Free Report) .
 
Partnerships with Amazon (AMZN - Free Report) and Disney/ESPN (DIS - Free Report) are helping them in this particular aspect of the content wars.
 
If learning to understand all the players and battles in those wars is of interest to you, TTD conference calls are always an educational feast. In the most recent Jeff Green CTV manifesto, my favorite part was how he described TTD aggressively "grabbing land" in digital advertising as he saw that TTD Platform Advertising Spend would grows 37% to $4.24B and total 2020 revenues would top $863M at least.
 
So far, analysts in the Zacks topline consensus have only taken that estimate down to $855 million in the past few weeks.
 
Meanwhile, TTD will be spending to develop the platform with new features and functionality as they serve their ad-buying customers with better tools and data.
 
On the conference call, Jeff Green had to explain again that he's often found apologizing for having strong EBITDA when they are supposed to be spending. Nice problem to have.
 
Here were the quarter details...
 
Q4 adjusted EPS $1.49 vs consensus $1.19 for a 25% BEAT
Q4 revenue $215.9 million vs consensus of $213.4M.
 
Q4 and 2019 Business Highlights
 
Continued Share Gain: 2019 gross spend on the platform was over $3.1 billion, a 33% increase from a year ago.
Strong Customer Retention: Customer retention remained over 95% during the quarter, as it has for the previous 24 quarters.
Continued Omni-channel Growth: Omni-channel solutions remain a strategic focus for The Trade Desk as the industry continues shifting toward transparency and programmatic buying.
 
Specific channel spend highlights...
 
Video grew 54% from Q4 2018 to Q4 2019.
Connected TV grew about 100% from Q4 2018 to Q4 2019.
Connected TV grew 137% from 2018 to 2019.
Audio grew over 185% from 2018 to 2019.
Mobile video grew over 50% from 2018 to 2019.
Mobile in-app grew over 67% from 2018 to 2019.
 
"Our vision is to change the way advertising is bought by enabling data-driven decisions. For The Trade Desk, 2019 was another major step toward achieving that vision. Total spend on our platform was a record $3.1 billion. Spend in Q4 topped $1 billion, the first time we had ever crossed that threshold in a single quarter. This record spend helped drive 39% revenue growth to $661 million in 2019. We also generated $108.3 million in net income and $213.9 million of adjusted EBITDA. We continue to deliver strong revenue growth while also generating profitability that is significantly higher than nearly all other comparable software and internet companies of our size," said Jeff Green, Founder and CEO of The Trade Desk.
 
Guidance: Platform spend grows 37% to $4.24B and Revs top $863M
 
"Our focus is on grabbing market share and deepening our engagement and strategic importance with our customers. As a result, in 2020, we expect gross spend on our platform to accelerate year over year to at least $4.24 billion and revenue to be at least $863 million. In the coming year, we will continue to make aggressive investments in high-growth areas such as Connected TV, data, and global expansion. As a result, we expect our adjusted EBITDA to be $259 million, or 30% of revenue. We believe investing in our core growth opportunities will maximize profitability over the long-term. I have never felt more confident in the direction of our business than I do heading into 2020."
 
The conference call saw lots of questions about earnings, margin and spend.
 
Now that EBITDA might fall back a bit, the analysts are confused and missing the big picture.
 
There were also great questions about the Google plan to kill cookies in 2 years. I highly recommend finding a copy of the call transcript if you want to learn more. I listen and re-read them religiously now.
 
The CME of Advertising Should Double in 2 Years
 
While it's tough to buy companies when their estimates are falling, the drop in TTD's fortunes hasn't been that dramatic so far. Still, impacts on the global economy are just beginning to trend and we have to watch for more waves of downward revisions to growth for advertising spend and TTD sales and profits.
 
Aggressive longer-term investors were not swayed though last week, scooping TTD shares quickly under $150 and enjoying 30%+ gains on the bounce this week. Until we know more about the depth and duration of a recession which will surely scale back some advertising budgets -- for products and services where consumers actually have to leave the house -- let me share an excerpt from my November podcast and article...
 
 
The Trade Desk model is centered around advertisers using a data-driven approach to targeting audiences and setting up automated programs to buy ad space according to their parameters, including elements like frequency, location, spend, and real-time optimization.
 
This "programmatic" model can see thousands of ad auctions take place every minute around the world as agency and brand "ad algos" compete for precision exposure to their messages.
 
TTD CEO Jeff Green opened the conference call with these remarks...
 
"Just so you have a frame of reference for that [38%] growth, remember that Magna Global estimates the programmatic advertising market is growing at around 20% this year. And the overall advertising industry is growing at 4% according to IDC. So in the fastest-growing segment of an industry that is expected to reach a TAM of $1 trillion in the next decade, we are significantly outperforming.
 
"In fact, we are once again growing at about double the pace of the industry. Our outpaced growth and market share gain are the result of investments we've made in key channels and markets. It's also because of our commitment to objectivity and independence. And it's the work we do across the industry with partners and standard bodies to make this an industry that advertisers and content providers trust."
 
Connected-TV Gives Ad Buyers Data They Never Had
 
For any investor interested in this new advertising model that will continue to gain share from the digital giants Google and Facebook, I recommend reading Green's 3700-word opening "manifesto" on the company conference call. It is truly an education in all things streaming.
 
But since I don't watch that much TV and don't have multiple streaming subscriptions, I invited my colleague Ben Rains on the podcast to help me sort out the jungle of offerings and competitive trends.
 
And we just happened to have this chat on the launch day for Disney Plus, the entertainment giant's $7-a-month streaming service for almost everything it creates.
 
Ben and I, with the help of further commentary from Jeff Green, discuss the players and the probabilities that any one of them will fail, or reign supreme.
 
For instance, how can Netflix (NFLX - Free Report) continue to invest so heavily in content -- without accepting advertising -- when it's now facing armies of libraries from AT&T/HBO, Comcast/NBCUniversal, Disney, and even Amazon?
 
I always used to think that Netflix had pricing power for its great content and could easily charge $20 per month. But that idea fell into jeopardy when Apple TV (AAPL - Free Report) rolled onto the battlefield at $4.99.
 
And what about Netflix's "stranger thing" of just dropping an entire season of a new show all at once for consumers to binge watch?
 
Since my focus in the Mind Over Money podcast is all about behavioral economics, I'm all over this.
 
So tune in to hear my views there and to get Ben's take on why Comcast launching their own magic box wasn't a Roku-killer.
 
I also explain the AMZN-TTD partnership from two important angles -- why Amazon chose The Trade Desk as a 3rd-party gateway to Fire TV and how TTD is changing the ad game by drastically reducing the potential for data-privacy abuses with their Unified ID solution.
 
Oh, I almost forgot Spotify (SPOT - Free Report) . I asked Ben to explain what Jeff Green meant in this quote from his conference call manifesto...
 
"Connected TV is changing all of that as more viewers access TV content via connected devices and smart TVs. And as more content providers build and launch new streaming platforms, advertisers can apply data to their TV campaigns for the first time. It's a game changer. And as I said two years ago, companies like Hulu, AT&T and Spotify were pioneers of this ad-funded streaming revolution. I said that they were what I call tea leaf companies. If you watch what they do, you can predict and know what others are going to do. They developed new TV and audio revenue models. They took strong positions on ad-supported options."
 
TTD's audio segment was actually the fastest growing in Q3 at 162% as it serves music, digital radio and the rise of podcast channels.
 
And finally on my rising podcast, we dish on why the whole streaming wars are just a fun walk in the park for Amazon and Apple.
 
Be sure to catch this episode if you want to understand how The Trade Desk wins, no matter who loses the streaming wars.
 
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