US stock: The Trade Desk – Yay or Nay?

The Trade Desk

The Trade Desk is an advertising technology company that utilize programmatic ad buying through its platform where ad buyers can create, manage and optimize data-driven advertising campaigns across display, video, audio on multiple media devices that includes computers, mobile devices and connected TV.

Wow what is that? That the question I asked myself when I come across this haha

How does it make money?

A lot of people probably call Trade Desk as Trade Desk and the correct name should be called The Trade Desk aka TTD Nasdaq symbol. The Trade Desk is a DSP (Demand Side Platform) that allows advertisers to purchase ads in real-time bidding (RTB) in tenth of a second that also helps to manage display ads across multiple medias online.

The Trade Desk earns revenue by taking a spread on the ad inventory purchased, pretty much like the same concept of stock bid and ask. The Trade Desk also provides a platform, or terminal for the agencies/advertisers to analyse and value inventory. Think of it like Bloomberg to the financial industry, a terminal where all types of financial services are provided in a single platform.

The Trade Desk does not compete directly with Google or Facebook walled gardens. If you want to advertise on Facebook or Youtube, you must use their platform and they do not provide any information to value their inventory. The Trade Desk uses anonymous data that is not personally identifiable to individual and does not have the same data privacy risks as other companies.

Demand Side Platform

Before this, you need to understand the world of advertising and it can get really complex:P I shall not get too in-depth into this.

In the world of advertisements, advertisers e.g. Coca Cola want to promote its products may engage advertising agency company like Dentsu to manage its advertising campaign or do it on their own. Publishers on the other hand is the creator of media content such as newspaper, TVs, social media etc. Advertisers or advertising agency will have to work with these publishers to put up ads in the publisher media outlet for a fee.

Exploding growth of online media also known as ad inventory over the last few decades has spurred the creation of an ad exchange where it acts as a marketplace for buying and selling of ad inventory through bidding. Think of it like a Singapore stock exchange except that you are trading ad inventory instead of company stock. This give rise to DSP that allows buyers of advertising space to manage multiple ad exchange in a single interface.

DSPs in general are third party platforms that allow you to bid or buy ad inventory from multiple sources simultaneously. Imagine this: in the old world of advertising business, billboards were put up for advertisements, to attract any potential customers that will buy your products. It was not until in the 1900s that lives improved due to better technology that we have advertisements on printed newspaper, radios, televisions etc. A newspaper will have columns to put up product advertisements, and television is able to churn out advertisements in between shows. These spaces are known as advertised space that can be sell to the marketers. A popular show at a scheduled timing will command an exorbitant advertised space after working hours where most people will be at home watching tv.

Fast forward to the digital age where almost everything has go online and that includes advertising space on websites that we see, popup advertising videos we have to watch in the midst of the Youtube show that we are watching, and social media platform that we used to connect with friends, family or even people that we never meet. It will be crazy to buy up all the advertisement space (such as advertisement pop up when u visit a webpage that you know that does not belong to the website creator) without harnessing the power of a programmable machine.

Traditional way of advertising using flyer

Quantitative (Financial)

The Trade Desk is a tech stock with lots of growth especially in the arena of programmatic advertising. There should be a yardstick to identify growth stock easily and quickly.

Introducing the rule of 40, this rule measures the revenue and profit margin of tech companies in an easy way. 1st measure the annual revenue growth of a company as a percentage e.g. 40% comparison of the year from 2017 to 2018. 2nd measure the profit margin e.g. 20% of the same company in the year 2018 and add the two percentages together. e.g. 1st metric 40% + 2nd metric 20% = 60%, in this example the company would have a value over 40% which is considered a pass while any value below 40% will be considered a fail.

One thing to take note that I personal prefers to use net profit margin for 2nd metric because it is generally better to be more conservative to have more margin of safety (Warren Buffet philosophy). The Trade Desk has a large addressable market with good economic moat, capital light business model. 10-K extract

Using The Trade Desk,

The revenue growth is 54.9%

The net profit margin is 18.5%

You will notice that I use 1 decimal place for my values. I think 1 decimal place is more than enough to calculate the rule of 40 and seriously this rule is just an estimate to see the health of a growth stock and never an accurate metric to decide a stock purchase. You can even do away with the decimal place if you want.

Disclaimer: Please note that this is the year 2020 but I used financial results of 2018 to compute my 40-rule metric. I prefer to use full year results of 2018 instead of trailing 12 months results because it is easier to compare the results with the previous years and I see no reason to adjust my metric to current stock price. This is just to give you a pretty good idea what kind of growth company that The Trade Desk is.

Obviously evaluation of stock requires much more and deeper financial analysis but I will want to keep it short and simple in my post.

Management Overview

“Go for any business that an idiot can run, because sooner or later, any idiot probably is going to run it”. This is a quote from Peter Lynch and advocate by Warren Buffet. I personally think you should not invest a stock based on the CEO. Although there are some companies like Tesla (Elon Musk) & Apple (late founder Steve Jobs) that do extremely well due to their leadership but it is better to focus more on the fundamentals of the business that will prevails over long term.

Qualitative

According to World Advertising and Research Center (WARC), global ad spending will grow 6% to $656 billion in 2020 with major events such as Tokyo Olympics and US presidential election. Digital advertising for the 1st time will make up more than half of the total spend. Between the tri-poly of Google, Facebook and Amazon on 40% of the advertising spend in 2020, the remaining will be open to rest of the players and this includes DSPs. The Trade Desk is already the biggest buyer of ad inventory outside of the walled gardens (Facebook & Alphabet).

Programmatic advertising industry is growing about 20%. According to one study that programming advertising represent a market of around $34 billion compare to the total global advertising market of around $725 billion and this will increase to $1 trillion by 2025 with programmatic advertising comprising most of the market. I do see The Trade Desk has lots of untapped opportunities in this addressable market.

The Trade Desk also offer one stop service in its platform like many Software as a service (SaaS) companies. The barrier to entry to build up these competencies will be an uphill task for competitors to level the playing ground.

Recommendation

The Trade Desk is at its infancy stage in programmatic industry and is still growing rapidly in this emerging trend. I do see a lot of exciting opportunities e.g. Connected TVs, Audios in this rising phenomenon which is becoming more and more evident in its latest financial report.

Even Amazon has now allowed advertisers to use third party ad-buying platforms including The Trade Desk to buy ads on the Amazon Fire TV devices. Previously if advertisers want to place ads in front of customers using Fire devices, they had to deal directly with Amazon. This certainly cause a dent to the walled garden of Facebook and Alphabet.

With a metric of 73.4 exceeding the rule 40, this is certainly a very healthy growth stock with very positive value for both revenue growth and profit margin co. It is very difficult to quantify the entry buy price for The Trade Desk as everyone has a different value play.

I followed the story of The Trade Desk and do my ‘homework’ for the last 6 months before I decided to have my skin in it. I can say that my entry price is between the range of 193-243 USD per share that happened in the last quarter of 2019. This is the only Xmas present that I bought for myself haha and it is an expensive one.

Disclaimer

I do not recommend telling anyone which stock to buy cause if it turns out good, all is well but if it turns out bad, you are the person to blame. All of us know that there is always a risk in stock investing, and we can never be sure on our investment decisions.

However, I do believe in sharing my experience and thoughts of my journey in stock analysis. Hopefully some of my readers can pick up something useful or even exchange some pointers along the way.

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