Please ensure Javascript is enabled for purposes of website accessibility

Why I'm Buying More Shares of The Trade Desk

By Austin Lieberman – Updated Dec 4, 2018 at 9:39PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Trade Desk's business looks stronger than ever heading into 2019. Here's why I'm buying more shares.

Despite reporting 50% revenue growth and a customer retention rate above 95%, shares of digital advertising company The Trade Desk (TTD -2.11%) traded down as much as 8% following its third quarter earnings report. The sell-off appears to have been fueled by fears of slowing growth in global advertising spend and a broader market sell-off among high-growth tech companies.  Notwithstanding its stock's recent volatility, The Trade Desk's omni-channel revenue growth, international expansion, and its newest series of products lay the foundation for a successful 2019 and beyond.  

mountain range



Growing in all the right ways

The Trade Desk's ability to diversify its revenue has positioned it for sustainable growth. Seven years ago, The Trade Desk had a problem: 100% of its revenue came from traditional TV advertising.  Throughout the past decade, traditional TV viewership has been in decline as consumers, particularly young adults, have increasingly decided to "cut the cord," leading to a decline in cable subscription rates.    That scenario could have spelled disaster for The Trade Desk. Thankfully, The Trade Desk has been able to diversify its revenue streams in recent years, reducing its dependence on traditional TV advertising.  Today, The Trade Desk's revenue is much more diverse, which provides optionality if one specific channel begins to suffer. The Trade Desk divides its revenue into five broad channels:

  1. Mobile advertising spend grew 65% year-over-year in the most recent quarter and now accounts for 45% of total revenue. Just seven years ago, mobile wasn't even a revenue channel for The Trade Desk  Mobile should continue to grow as advertisers diversify away from relying so heavily on the platform-specific advertising offered by Facebook, Alphabet, and Amazon to reach the rest of the internet.  
  2. Traditional TV is now less than 30% of revenue and growing at roughly 20% year-over-year.  Management expects traditional tv to continue shrinking as a percentage of overall revenue due to continued declines in viewership and cable subscriptions and the company's strategy of focusing on faster growing channels.
  3. Connected tv or internet tv is one of the company's newest and most important channels. The Trade Desk does not break out connected tv as a percentage of total revenue, but growth has been very strong. In the fourth-quarter of 2017, Connected tv inventory grew by 1000% year-over-year. Then in first-quarter 2018, CTV spend increased 2100% year-over. Last quarter, CTV spend was up 10X year-over-year, which was "the most bullish number we've ever shared" according to Trade Desk CEO Jeff Green. 
  4. Audio spend grew at 200% year-over-year  and management believes audio to be "one of the most on-sale portions of advertising today."
  5. Data spend, which allows customers to gain additional insights such as cross-device analytics on The Trade Desk's platform,  grew by over 70% year-over-year  and is likely to be a catalyst going forward as companies continue to leverage The Trade Desk's over 9 million ad impressions per second to optimize ROI with data-driven insights.

Over the last seven years, management has successfully transitioned The Trade Desk  to an omni-channel revenue model. With products serving mobile, Connected tv, and audio, The Trade Desk is ready to meet consumers wherever they browse media.

The international party is just getting started

The Trade Desk's ability to scale internationally suggests that it has plenty of growth left ahead of it. During the third quarter, nearly every office outside of the U.S. grew revenue at a record pace. Over the past year, Spain grew 380%; Hamburg, Germany, grew 206%; and Hong Kong grew by 107%.  

Jeff Green believes China, which is currently the company's smallest market, will rapidly become its largest as the country becomes the largest advertising market in the world. The Trade Desk has been welcomed into China because they are not bringing a competing product into the country. Instead, through partnerships with global advertisers like Mazda , they are bringing ad-dollars into the country. This dynamic has led to recent partnerships with some of China's largest platforms, including Alibaba, Tencent Holdings, and Baidu, which give The Trade Desk the runway to be more aggressive with expansion into China.

As an objective partner that doesn't own any media itself, The Trade Desk should continue to find success leveraging partnerships with large platforms to expand internationally. This should make the company's omni-channel revenue growth even more resilient.

The Next Wave was a big risk, but it's paying off

The Trade Desk's newest series of products, labeled The Next Wave, has added to its already strong service offering, providing even greater value to its customers. The company dedicated 40% of its engineering resources for two years to develop The Next Wave, which Green calls "the biggest enhancement to The Trade Desk's platform ever." Green's goal is to create "consumer surplus" by continuing to add value and increase customer satisfaction with The Trade Desk's platform to maintain its 95% client retention rate. In keeping with this strategy, TTD customers are able to upgrade to The Next Wave without any increase in fees.

The Next Wave release featured three new products: Koa, an AI that scans The Trade Desk's proprietary 9 million impressions every second to inform media planning and buying; Planner, which uses insights from Koa to inform media campaigns and maximize ROI; and Megagon, a media buying tool which combines an intuitive user interface and Koa's optimized recommendations to transparently display what each ad impression will cost and how selections will impact performance. 

paper boat in the water


In less than six months, The Next Wave now accounts for 42% of customer spending with The Trade Desk, and Green expects it to account for over 50% by year-end.Customers using the new products have realized up to 20% savings on cost per thousand impressions (CPM), and, on average, increased cross-device and data spend.

The Trade Desk invested heavily in The Next Wave, and it's paying off. Customers have clearly loved the new products, and if the first six months are any indication, customer retention and spending will continue trending in the right direction.

What about the Giants?

The Trade Desk faces competition in online advertising from some of the largest businesses in the world, including Alphabet, Facebook, and Amazon. Although these giants control a large portion of the advertising market, growth across the industry should allow for multiple winners in this space. If The Trade Desk can maintain its track record of growing diverse revenue streams, expanding abroad, and developing innovative products that customers love, it will continue growing for years to come. I'm betting that Founder Jeff Green and The Trade Desk will continue to deliver.  

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Austin Lieberman owns shares of The Trade Desk. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Baidu, Facebook, Tencent Holdings, and The Trade Desk. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.