The coronavirus outbreak caused many businesses to shut their doors to the public. If you're not open to customers, there is less incentive to market to them. As a result, when the pandemic first led cities and states to issue stay-at-home orders, advertisers cut spending wherever they could. The Trade Desk (NASDAQ:TTD), which allows advertisers to turn ad campaigns on and off at will, experienced decreasing revenue in its second quarter because of those cuts.
Now, as businesses are starting to reopen, The Trade Desk is set to benefit as advertisers cautiously ramp up spending. Speaking about this in the company's first-quarter earnings call, CEO Jeff Green said, "We believe that data-driven advertising is on the front lines of recovery where advertising fuels and even ignites growth, and where growth fuels more advertising. As The Trade Desk is one of the leaders in data-driven advertising, we strongly believe that we will play a critical role in the global economic recovery."
Optionality is becoming a priority
While it may be true that many businesses across the U.S. are starting to reopen, they are doing so cautiously. The risk of a surge in new coronavirus cases could lead to more shutdowns, so until there is a definitive solution such as a vaccine, businesses that rely on bringing people into their stores will remain hesitant to spend.
This risk of future disruptions is causing advertisers to seek more flexibility in their investments and commitments. It no longer makes sense to agree to an advertising campaign months in advance when companies are unsure if their doors will even be open. This major shift in marketers' focus is likely to hurt traditional TV network advertising, which typically requires long commitments, not to mention the uncertainty around popular programming and live sports.
These longer-term commitments made it difficult for companies to cut ad spending with TV networks when the pandemic first closed businesses around the country. The Trade Desk saw its revenue decline 12.9% year over year in the second quarter, partly because of the flexibility it offers.
Now that businesses have reopened, they are focused on getting the word out to potential customers. The Trade Desk is poised to benefit as marketing budgets are ramping back up. The same agility that The Trade Desk offered when budgets were shrinking means it is likely to benefit as spending rises, allowing the company to take an even bigger share of the market. Moreover, The Trade Desk can reach over 80 million households in the U.S., so a marketer that starts with a smaller, more targeted campaign has the option to expand if necessary. What hurt the company in the second quarter is going to help it in the second half of the year.
Businesses are not reopening all locations
In addition to timing, businesses will also be looking for geographic flexibility. The Trade Desk's omnichannel offerings across connected TV, mobile, video, and audio allow marketers to target consumers in the exact regions they are trying to reach. This helps businesses save on costs and improve their brands -- no one appreciates being shown irrelevant ads.
Tilly's, a specialty retailer, had most of its 238 stores open during August across the U.S., save for the 33 it has in certain parts of California. Such a retailer may not want to advertise to individuals in those regions where stores are still shuttered. There are many examples of companies like Tilly's who have a patchwork of reopenings and need a more targeted approach to advertising. The Trade Desk will likely be the partner that many of these companies choose to fill that need.
In fact, despite the uncertainty in this environment, management was still confident enough to provide guidance for the third quarter that signals a complete reversal from the prior period. The Trade Desk expects revenue to land in the range of $177 to $181 million, which would represent 9% year-over-year growth at the midpoint.
What this means for investors
The Trade Desk will undoubtedly benefit as marketing budgets start to increase. It remains to be seen if the company can sustain these advantages for the longer term. Investors are bullish that The Trade Desk can succeed though as the tech stock is up 65% year to date.