The global digital advertising market is expected to grow substantially over the next few years. With an expected $526 billion in digital ad spending in 2024, advertising technology companies that help connect advertisers with publishers will be increasingly critical.
The Trade Desk (TTD +5.99%) is the leading provider on the advertiser side and PubMatic (PUBM +5.29%) is a fast-growing disruptive player on the publishing side. Both of these companies work to enable the best deals for advertisers and publishers, which makes it easy for them to dominate this industry as it continues to grow. Here's why I think The Trade Desk and PubMatic are the best players in this space.
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The Trade Desk: The buy side of adtech
The Trade Desk's platform relies on artificial intelligence (AI) to find the best placements for advertisers. It uses AI to predict and recommend where advertisers should bid for space to optimize their advertising campaigns.
The real edge on the buy side is The Trade Desk's scale advantage. The company is the leading buy-side platform that serves dozens of markets from San Francisco to South Korea. This attracted over $4.2 billion in spending in 2020.
As more advertisers spend on its platform, the company collects more engagement and viewer information, which it then feeds into its AI system. With this information, its AI becomes more accurate, making it even more valuable for incoming advertisers. More importantly, this scale advantage will only grow more important as the industry grows. The advantage has already led to less than 5% customer churn over the past seven years.
Another major factor that separates The Trade Desk from its competition is its open-source technology, Unified ID 2.0 (UID2), which is quickly growing as the replacement for cookies. UID2 takes volunteered information like email addresses from consumers and creates private consumer personas. With UID2, advertisers can maintain accurately targeted advertising while keeping user identities private.
UID2 has been rapidly adopted across the world. Recently, leading TV streaming players in Southeast Asia have adopted UID2, making it a truly global service. UID2 is free, but The Trade Desk obtains all of the information running through UID2, and it can then integrate this data into its AI. With UID2 on its way to becoming a global cookies replacement, The Trade Desk could obtain extremely large amounts of data to perfect its solution.
With all of this data streaming into the company, The Trade Desk's future looks incredibly bright. The company trades at a nosebleed valuation of 40 times sales, but considering its dominant position in an extremely large industry, I think this company is worth paying up for.
PubMatic: The sell side of adtech
PubMatic is a much more risky stock, but with a $1.8 billion market cap, it has much more growth potential compared to The Trade Desk and its $43 billion market cap. PubMatic does not compete with The Trade Desk on the buy side, but its platform is specialized for publishers and the sell side. PubMatic is trying to overtake the market leader, Magnite (MGNI +3.59%).
PubMatic has major advantages over the current leader, namely its organic growth. In the third quarter, the company grew revenue 54% year over year to $58 million, likely driven by major improvements in customer engagement. Customers from one year ago spent an average of 57% more in the third quarter than they did a year ago. This rapid increase shows that, despite not being the leader, PubMatic is becoming very popular in the space.
This is especially impressive when compared to Magnite's growth. On the surface, Magnite posted Q3 revenue growth of 116% year over year, but this was heavily influenced by large acquisitions. The company is almost solely growing by acquisition, making two acquisitions that affected Q3. Magnite's pro-forma revenue growth, which assumes that the acquisition of SpotX and SpringServe were a part of Q3 2020, was just 26% in Q3 2021. This still isn't a true pro forma calculation, and therefore doesn't show Magnite's real organic growth (which would likely be much lower), so PubMatic has a clear advantage on this end.
PubMatic has also developed its own infrastructure to house the data it receives. While Magnite and other competitors use third parties, PubMatic has spent lots of development expenses on creating its own solution. This has led to impressive profitability because of its rock-bottom costs: In Q3, the company brought in $13.5 million in net income.
This is (again) impressive when compared to Magnite. Despite being $600 million larger, Magnite is roughly breakeven for the year. Because of this, PubMatic trades at 40 times earnings -- an appealing valuation and much lower than its competitor's valuation of 900 times earnings. Financially, PubMatic is leaps and bounds ahead of Magnite, despite being behind it in terms of size. Each company's growth tells a story, and with Mangite failing to grow by itself, I think that PubMatic's potential future is much more appealing.
