Why The Trade Desk Stock Is Still a Smart Buy

The Trade Desk (TTD 3.35%) specializes in digital advertising. Its demand-side platform helps ad buyers create data-driven campaigns across devices like desktop, mobile, and connected TV. And despite the dominance of rivals like Alphabet's Google and Facebook, The Trade Desk still benefits from a big market opportunity and a strong competitive position.

In this Backstage Pass video, which was recorded on Oct. 13, Motley Fool contributor Trevor Jennewine shares his thoughts on why The Trade Desk is still a smart long-term investment.

Trevor Jennewine: I've read a lot of articles around the internet talking about how a lot of advertising is already digital -- I mentioned earlier that about 61% of ad spend would be on digital ads this year. But just 21% is going toward programmatic advertising. There's still a huge runway for growth in this industry, and that is where things are headed. That quote I showed earlier, management believes that all media will be transacted by machines in the future. It will all be transacted programmatically. I think that there is a lot of growth in this industry, and I think that should be a "high tide raises all ships" type situation.

This is good for The Trade Desk, but it's good for a lot of other players in the industry as well. Later on in the presentation, we'll hit some of the things that differentiate The Trade Desk from its rivals.

This slide just summarizes what The Trade Desk does. Its platform is self-service, so ad agencies. It gives ad agencies to access to a wide variety of ad inventory. Like I mentioned, that's across mobile devices, desktops, connected TV, social platform, search engines -- pretty much the whole internet. The Trade Desk is a gateway to purchasing digital ad space. I believe this 500 billion figure is actually higher now. I think The Trade Desk platform sees something like 600 billion ad impressions a day. The company is giving its clients access to a lot of inventory, and it's collecting a lot of data in the process, which just feeds back into its predictive models to make targeting more efficient.

Nicholas Rossolillo: That's a crazy number isn't. I think Magnite has a similar figure in their presentation about the trillions of ad requests and impressions. But that get made across the world on the internet every day. We're talking huge numbers, massive amounts of data, huge audiences as well. This is a huge market.

Jennewine: The Trade Desk is the leading independent demand-side platform, which just means that it's achieved a greater scale than all of its other independent rivals. We'll cover what that means, but essentially independent just refers to the fact that The Trade Desk doesn't own any content. That separates it from a company like Google or Facebook, both of which own web content.

That scale, it benefits its clients because they're able to choose from a huge array of digital ad space; and it benefits The Trade Desk, because they're able to capture that data. That enables them to correlate things like viewer demographics with clicks and conversions, so that over time, they're able to let their clients know: "Hey, this ad impression is particularly valuable. There's a very high chance of conversion here. Or forget about this one; this isn't worth anything to you. There's not a very good chance that this user is going to take the desired action."

This slide right here, it focuses on the fact that The Trade Desk is an enabler, not a disruptor in the industry; and that has helped it gain traction with a lot of ad agencies. The company had about 875 customers as of the end of 2020.

Then, this slide hits on one of the differentiating factors for the business. That is that The Trade Desk focuses exclusively on the buy side. I mentioned that it doesn't own any content. Let me explain why that matters.

Google and Facebook: Google owns Google Search, YouTube, Gmail, several other web properties. And then Facebook has its social network, and Instagram. Both of those companies, they absolutely dominate the digital ad industry right now. They have over 50% market share collectively. Their business model obviously works. But there's a conflict of interest there.

They have these walled gardens and they're selling their own ad inventory. They're not necessarily incentivized to help an ad buyer find the best inventory. They are incentivized to sell them the best inventory that they have to offer within their walled ecosystem.

Then, to make things more complicated, both Google and Facebook actually work with third-party publishers, and that just means suppliers of ad space. So, if you have a website or a mobile app, you can make ad inventory [available] through Google's or Facebook's buy-side tools. Now these companies are selling their own ad-inventory alongside third-party ad inventory.

Again, that just creates a conflict of interest. They're obviously incentivized to sell their own ad inventory. The Trade Desk sidesteps that whole situation. The company does not own any content. It does not own any ad space. It doesn't buy up ad space and resell it at a higher price. It doesn't work on the sell-side of the equation. It's exclusively focused on the buy side. If you're looking to buy digital ad space, those are the types of clients that would make use of The Trade Desk's platform.