Digital ads -- specifically of the data-driven variety -- are becoming a high-demand megatrend. That's because connected-TV services are popping up like weeds, music streaming is still in growth mode, and general advertising on the internet and other web-related services is becoming an increasingly large slice of the overall multi-hundred-billion-dollar-a-year pie.

This movement continues to play into the hands of The Trade Desk (NASDAQ:TTD), the small cloud-based advertising platform that helps marketers plan and launch campaigns. Revenues in the third quarter of 2019 rose 38% to $164 million. In case you aren't up to speed on what's going on here, CEO Jeffrey Green elaborated on the data-driven "programmatic" ad segment during the third-quarter earnings call:

Just so you have a frame of reference for that [revenue] 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 [total addressable market] of $1 trillion in the next decade, we are significantly outperforming.

A couple sitting on a couch watching a TV displayed in the background.

Image source: Getty Images.

Reading the tea leaves

But why is programmatic advertising -- and specifically that which is on TV, music, and other forms of entertainment -- such a big deal? For many of The Trade Desk's customers, TV ad spending represents the most important category. Especially when it comes to consumer goods and retail, TV and audio are powerful tools because of the audience's high level of engagement with the programming. However, in times past, advertisers had little to no insight on how a campaign actually performed save for a general uptick in sales activity used as a yardstick after an ad's launch.

The internet is changing all of that, though. Using The Trade Desk's software, advertisers can target a more specific audience using general demographic information and then track the campaign's effectiveness via clicks and other digital tracking tools. Green said that many new companies that have begun using The Trade Desk with a small budget have aggressively ramped up spending on the platform after vetting the positive results.

Thus, a mass migration to programmatic-type ads seems to be underway. Green called companies like Disney's (NYSE:DIS) Hulu, AT&T's (NYSE:T) HBO, and Spotify (NYSE:SPOT) "tea leaf" businesses. As early pioneers of online ad-based revenue models, they have proven to be good predictors of what the competition will eventually do. Traditional cable TV is losing customers by the millions, entertainment content costs are going up, and the fight for subscribers is heating up even on the TV streaming side of the equation. To The Trade Desk, it all points to ad-supported online TV being the future for all of these businesses, with Green even saying he expects Netflix (NASDAQ:NFLX) to eventually experiment with the model.

What it means in numbers

All of this sounds great, especially the fact that so many connected TV services are coming online. Even still, third-quarter revenue was a deceleration from what The Trade Desk has been putting up so far this year. Nevertheless, paired with the first half, sales are going strong, and the operation is free cash flow positive -- giving this advertising technology outfit room to expand without burning through money on the balance sheet.

Metric

Nine Months Ended Sept. 30, 2019

Nine Months Ended Sept. 30, 2018

Change

Revenue

$445 million

$317 million

40%

Operating expenses

$386 million

$258 million

50%

Adjusted earnings per share

$2.19

$1.60

37%

Data source: The Trade Desk.

Besides, the connected-TV movement and progression toward programmatic advertising are strong tailwinds that should continue to propel The Trade Desk for some time. Fourth-quarter sales are expected to be some 33% higher than a year ago, and Green said his company expects "similar opportunities" for growth in 2020 -- driven again by connected TV, with live events like the U.S. elections and the Summer Olympics and their highly engaged audiences making for another busy year for marketers. With yet another good quarter in the books, this stock remains a buy for the long haul.