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How Wrong is the Nomura Bear Case on The Trade Desk?

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This year, according to estimates published by eMarketer in February, will be the first that online digital advertising surpasses traditional ad buying. The research firm projected that total US ad spend will hit $238.82 billion, with digital grabbing nearly $130 billion or over 54% of the total.

Obviously, Alphabet (GOOGL - Free Report) and Facebook (FB - Free Report) dominate the online digital ad space, with Amazon barely being a threat at this point. And how could anyone compete with those three behemoths?

Well, there's a new business model outside of the "walled gardens" of Google and Facebook that has gained so much traction, it's created a $12 billion company with over $600 million in revenues.

The Stock Exchange for Advertising

When I try to explain what The Trade Desk (TTD - Free Report) does, people get easily confused. I assume it's me and I just keep trying, with several articles and video explainers under my belt since I started pounding the table to buy the stock in May under $200...

Top Stock Picks Video, May 20: TTD and ROKU

Bull of the Day, June 28: TTD

The June article has lots of good info about how The Trade Desk is disrupting the advertising industry with "programmatic" precision and efficiency for ad buyers, while also partnering with traditional ad agencies as key players who remain important in the ecosystem.

In the video that accompanies this article, I try once again to explain programmatic by asking you to think of your advertising formula -- including target audience, preferred websites/TV channels, time of day, frequency, etc -- turned into an automated ad buying system that constantly scans available "real estate" and participates in relevant auctions that occur millions of times per hour across the entire internet, including connected TV (CTV).

This is why The Trade Desk CEO Jeff Green compares their platform to the modern fully-electronic stock exchange with tens of millions of trades being transacted by automated, algorithmic systems.

Just like hyper-speed electronic trading delivering more access and liquidity to individual investors, The Trade Desk model is giving ad buyers more data, precision and control.

Is the Disruptor Overvalued?

But in my discussions with investors about The Trade Desk (TTD - Free Report) , I keep coming across skepticism. How can they possibly compete with Google and Facebook, the two behemoths of digital advertising in the age of the Internet?

And what if this new type of ad buying called "programmatic" doesn't grow as fast as the company says?

Part of this skepticism comes from one of the most bearish investment bank analysts on the company.

On June 12, Nomura Instinet analyst Mark Kelley downgraded The Trade Desk to Reduce from Neutral with an unchanged price target of $144. In the research note, Kelley described the company's underlying business fundamentals as "relatively solid" but "out of sync with near to medium-term investor expectations and the story being told."

Kelley believes The Trade Desk "isn't outpacing the industry as much as investors think" and that its total addressable market (TAM) is not $1 trillion. He sees the company's long-term revenue potential as being about $12 billion, which makes the company overvalued now vs its $11 billion market cap.

The analyst acknowledged that digital advertising at over $100 billion in spend, will keep becoming a bigger part of the $700 billion global advertising market (based on IDC data), but Google and Facebook will continue to dominate that segment. Kelley sees the remaining market that The Trade Desk would have access to growing to about $60 billion in 2021.

On August 8, after another blowout “beat and raise” quarter from TTD, the Nomura analyst raised his price target to $165.

What's Missing From This TAM Pie?

First off, Jeff Green doesn't claim that we're headed to a $1 trillion digital ad market soon. Here's what he said in the company's August 8 quarterly report...

"In 2019, according to IDC, global advertising spend will be about $725 billion, up over 4% from 2018. At current growth rates, global advertising will be a trillion-dollar industry in about seven years, one of only a handful of industries with a TAM over that mark.

"Programmatic is still a relatively small part of total global advertising. It is estimated at around $34 billion in 2019. But it is growing 5 times faster than total advertising at around 20% year-over-year, according to Magna Global. We maintain our prediction that, before long, most advertising will be digital, and nearly all of it will be transacted programmatically. This puts us in the fastest growing segment of an expanding industry where we expect to continue to aggressively take share."

My take is that if the programmatic segment can grow 21% to $200 billion in 10 years and The Trade Desk owns 30% share -- a $60 billion market -- that could create $12 billion in revenues. And since large brands are just migrating to programmatic, the potential for faster growth is real.

In the video, I show how The Trade Desk consistently makes 20% on the volume of ad transactions that cross its platform. The company has also been profitable since 2013, showing they have their business model margins well defined and operational.

I also use many presentation materials from The Trade Desk that you’ll want to reference when conducting your due diligence.

What I forgot to mention is TTD's new partnerships with Amazon (AMZN - Free Report) and Disney (DIS - Free Report) . The company could easily maintain 35-40% growth with these new avenues. With Amazon, advertisers will now be able to use The Trade Desk to place ads on Amazon.com and Fire TV. And with Disney, The Trade Desk is teaming up to offer new ways of offering ad buyers access to live sports events on ESPN.

Disclosure: I own TTD shares for the Zacks TAZR Trader portfolio.

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