Online advertising-services veteran The Trade Desk (TTD -0.57%) is a polarizing company. Many analysts and investors love the company's ability to boost its revenues and profits over time and have sent share prices 1,250% higher over the last three years.
At the same time, Alphabet's (GOOGL -0.25%) (GOOG -0.22%) online search-services and content-management giant Google is changing how user-tracking technologies work. Critics argue that the changes constitute a massive risk for ad-buying technology companies whose core services rely on detailed user behavior data. Wall Street's price targets on the stock vary wildly, ranging from 29% below Tuesday's closing prices to a 61% increase.
All that being said, I have no intention of parting ways with my own Trade Desk shares in the foreseeable future. Here's why this beleaguered stock is worth the risk.
The big problem
Long story short, Google's market-defining Chrome browser is making it impossible to track user behavior through the use of third-party cookies. Alphabet announced the change in January 2020, following the lead of rival browsers Firefox and Safari. The changes started to roll out last month as an optional setting, which will become the default choice by the end of the year.
For now, third-party cookies can still be used to collect and share user-behavior data, except in the privacy-minded Incognito mode. Since most people never touch their browser settings, not much has changed yet. That will change when Google puts its foot down to make the stricter cookie permission the default choice for everybody.
It's not the end of the world
Third-party cookies are convenient, traditional, and easy to use but aren't the only game in town. Advertising-technology companies like The Trade Desk started to develop alternative-tracking methods before Google announced its gradual Chrome changes.
The Trade Desk started its own Unified ID platform in 2018, replacing the outdated cookie technology with an anonymized, encrypted tag that's unique to each internet user. The company has enlisted support from every independent ad-tech company worth its salt, and dozens of content publishers are already incorporating Unified ID 2.0 in their own platforms.
Google, of course, is going in a different direction. The company has promised not to replace the old cookie system with any other browser-based tracking system. Instead, Google proposed a new application-programming interface (API) that lets content publishers collect user data and then share it with selected advertising solutions in a privacy-focused form. The Federated Learning of Cohorts (FLoC) API is still under development, and Google plans to start testing the system over the summer of 2021.
What's next for The Trade Desk?
Whether The Trade Desk's Unified ID 2.0 becomes the industry standard for user-behavior analysis or Google's FLoC solution gains the upper hand, ad companies clearly won't be left in the dark without a flashlight. In fact, both FLoC and Unified ID promise to expand the scope of ad-tracking platforms by expanding the third-party cookie idea's browser-based solution to alternative publishing channels, such as smartphone apps or media-streaming set-top boxes.
The next couple of years may be rocky as players on every side of the digital advertising game are mapping out their revamped long-term strategies. After that, we should be left with a healthy and thriving ad-buying industry.
Investors can approach this evolving situation from many angles, but The Trade Desk is a firmly established leader in several sub-sectors of the online advertising industry and should remain a winner when the dust has settled.
The rumors of The Trade Desk's demise have been greatly exaggerated.