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Here's The Trade Desk's Amazon-Sized Growth Opportunity

By Jamal Carnette, CFA – Sep 25, 2021 at 12:51PM

Key Points

  • In a recent blog post, The Trade Desk called retail advertising a "sleeping giant."
  • Retail media is expected to more than double over the next five years.
  • The Trade Desk is in a good position to win market share in this space.

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The Trade Desk is taking cues from Amazon's fastest-growing business.

The Trade Desk (TTD -1.80%) investors are understandably bullish about the company's future. Under founder and CEO Jeff Green, shares have exploded since its 2016 IPO at $1.80 (split-adjusted) and are now trading above $75, providing investors with 4,000% returns.

In a digital advertising industry controlled by the walled gardens of Alphabet, Facebook, and fast-growing Amazon, The Trade Desk has carved out a space as an independent provider who is in favor of a transparent and open internet. But that's not to say that The Trade Desk isn't paying attention to its competitors -- and Amazon's recent results may have pointed to a massive opportunity.

Business presentation discussing market share.

Image source: Getty Images

The Trade Desk's next opportunity is a "sleeping giant"

In a recent blog post, The Trade Desk addressed the opportunity in retail digital media advertising. Digital advertising has so far mainly focused on outlets with significant "inventory," a.k.a. web pages; major publishers like the New York Times, Walt Disney's ESPN, etc., are considered prime spots for brands to market their products.

However, The Trade Desk draws attention to the opportunity many advertisers are overlooking on e-commerce sites, calling it the marketing industry's sleeping giant.

In the post, The Trade Desk noted:

  • The 16th-largest website in terms of U.S. traffic is Walmart.
  • Amazon's first-quarter report featured 77% year-over-year growth in its "other" unit, which consists mainly of advertising services.
  • Retail media is expected to grow from $20 billion to $50 billion in the next five years, according to MediaLink.

The takeaway is quite clear. Brands should direct more advertising dollars from generic websites to pay for better product placement or sponsored ads on e-commerce sites. The closer ads are to the buying process, the greater the value they will provide for all stakeholders in the process -- including buyers. And if any e-commerce site is looking to compete against Amazon, it will need to offer brands the option to market as effectively as Amazon's sponsored product placement. 

More effective marketing at the "tip of the buying spear" will help brands better handle "cookiegeddon." Apple has already banned third-party cookies (3PCs), while Alphabet is ending the practice in 2023.

Banning 3PCs will result in a decline in retargeting -- when a product you don't buy stalks you around the Internet -- and limit the effectiveness of digital ad campaigns. Brands can offset the decline by more effectively advertising "in-store," a.k.a. on e-commerce sites.

Consider this an added growth lever

One thing I look for in my investments is optionality, and The Trade Desk has it in spades. The company continues to benefit from mobile and desktop advertising as more marketing dollars follow eyeballs that are defecting from radio and print media.

While The Trade Desk will continue to have less market share than Facebook and Alphabet, digital advertising is not a winner-take-all market. For those looking to advertise outside of these walled gardens, the company's Unified ID 2.0 opt-in based 3PC replacement should win share from publishers looking to collect more data from their visitors.

In the short run, it will likely be The Trade Desk's connected TV (CTV) business that will power the top line. Even television executives are hedging their bets when it comes to subscription-based cable, and are seeing significant viewership growth in advertising-supported video on demand (AVOD) streaming services.

Last year, Fox Corporation acquired AVOD streamer (and UID 2.0 partner) Tubi for $440 million and promised it would be a billion-dollar business. ViacomCBS's free AVOD Pluto TV is growing approximately 80% per year and is on track to produce $1 billion in full-year revenue by 2022.

An expensive stock, but worth it

The biggest risk for The Trade Desk investors is its expensive valuation. Currently shares trade at 35 times sales, with a forward price-to-earnings ratio of 144. As a growth stock, the company will need to continue showing strong growth in revenues and earnings to keep investors satisfied. Otherwise, these lofty multiples could quickly collapse.

So far, the company appears to be handling the pressure well. The Trade Desk recently reported second-quarter earnings, growing revenue 101% and diluted EPS 100% over the prior year's corresponding period. As the recent blog post shows, The Trade Desk has multiple growth levers to pull to keep its top line growing at a rapid clip.

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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA owns shares of Amazon and The Trade Desk. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, The New York Times, The Trade Desk, and Walt Disney. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, short March 2023 $130 calls on Apple, and short October 2021 $46 calls on The New York Times. The Motley Fool has a disclosure policy.

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