For long-term investors, companies that are innovating and reshaping their respective industries can often be the most lucrative investments. Many times, however, that innovation might not pay off for some time, so it is important to hold the companies that are reshaping their industries for many years.

Finding these companies can be a challenge. Recognizing innovation before it is happening or while it is in the early stages can be very difficult, but this stock is a clear example. Here's why I think The Trade Desk (NASDAQ:TTD) is transforming the advertising technology industry for the better and why I think it is deserving of a spot on your watch list if it is not in your portfolio already. 

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A free alternative

For the first five months of 2021, shares of The Trade Desk were getting crushed because both Apple and Alphabet's Google said their platforms would be getting rid of cookies. For online and programmatic advertising companies, cookies have been a vital piece of their puzzle, providing information about consumers so that companies like The Trade Desk can find the best place for advertisers to reach their target audience. 

Some companies like The Trade Desk have been working on cookie-less alternatives that provide similar information but maintain consumer privacy, but many investors did not believe these new solutions were effective until The Trade Desk reported its third-quarter results. 

The Trade Desk has created a solution called Unified ID 2.0 (UID2), an open-source platform that aggregates anonymized data that has been volunteered by consumers to create personas for advertisers. These personas do not have consumer names attached but are rather traits of a specific consumer that advertisers can target. Unlike cookies, UID2 maintains the privacy of the consumer, and rather assigns the data it receives -- like an email address -- to the persona, called a token. That token does have information about the consumer, but it only gives information relevant to advertising to the advertiser, enabling advertisers to effectively sell their products without compromising the privacy of consumers. 

This solution is completely open-source, meaning that it is meant for the entire adtech industry to use, and top sell-side adtech platforms like PubMatic are able to utilize this as well. For The Trade Desk, this does not bring in any revenue, but it solidifies it as the buy-side market leader. It is also creating lasting bonds with partners across the industry.

Results of innovation

Possibly the most important thing that came out of the company's third-quarter earnings is that Apple's new regulations had no material impact on the company's business, meaning its UID2 solution is as effective, if not more effective, as cookies for advertising. 

The Trade Desk even had a case study this quarter demonstrating how effective UID2 was. One of its customers, Made In, reported a 20% improvement in its costs relative to the results of its ads. Additionally, its ads were more effective with UID2 than with cookies. Twenty-two percent more of its audience acted on its ads 33% faster than with traditional cookies. 

While The Trade Desk doesn't make money directly off of UID2, it is benefiting from positive results like these by creating lasting relationships that have led to financial betterment for the company. In Q3 2021, the company earned over $300 million in revenue due to increased actions taken by its customers. The company also earned $60 million in net income for the quarter. Those figures grew 39% and 44% year over year respectively. 

The Trade Desk has already had extreme success retaining customers, and that did not stop with the success of its new platform. The company retained a churn rate of less than 5%, which it has maintained for the past seven years. With The Trade Desk's creation of what could possibly be the new industry standard, I suspect that this trend will remain for the next seven years as well.

Where dominance could take the Trade Desk

No other buy-side competitor comes close to the scale that The Trade Desk has, which is why it has the best chance of continuing its market leadership as the advertising space grows. Global ad spending is reaching $725 billion, yet the top dog had just $4.2 billion in spending running through its system in 2020.

This large market leaves plenty of room for the world to adopt the company's futuristic solution, partner with The Trade Desk, and then expand that relationship. The company also has a top CEO, Jeff Green, that has been nothing short of visionary since co-founding the company in 2009, and The Trade Desk's founder recently announced plans to stay with the company for a decade or more, indicating that this future could become a reality. If UID2 can become the new industry standard as the world moves away from cookies, The Trade Desk could grow invaluable partnerships which could allow it to grow immensely over the next decade. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.