Advertising is undergoing a fundamental shift from traditional mediums to programmatic, omnichannel, and digital formats. Digital advertising encompasses mobile ads, connected television (CTV), video, search, and more. The Trade Desk (TTD 1.09%) operates on the demand side of the equation, working with advertisers and their agencies. PubMatic (PUBM +2.47%) occupies the sell side, working with publishers and developers. Together, these two companies are at the forefront of this shifting landscape.
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The case for The Trade Desk
With a $36 billion market cap, The Trade Desk is more prominent and further along in its development than PubMatic, which is a small-cap stock. Though both companies are around 15 years old, The Trade Desk has been public since 2016, while PubMatic only made its debut in late 2020.
Both companies are growing revenue quickly. The Trade Desk posted over $301 million on its top line for the third quarter of 2021, along with adjusted EBITDA of $122.7 million. Those figures were up 39% and 59% year over year, respectively, and adjusted EBITDA margin jumped five percentage points to 41% -- a terrific sign for the company's scalability. This marked another record revenue report for the company ahead of what could be a blowout fourth quarter. Due to holiday advertising, fourth-quarter revenue typically runs much higher for adtech companies. The Trade Desk has guided for at least $388 million in sales for that period, which would easily top the prior-year quarter, marking another record for the company.
The Trade Desk's product is very sticky, and customers love it. Its 95% customer retention rate is evidence of this. The retention rate is not a new phenomenon, either. According to the company, it has been over 95% for seven straight years. Its revenue is also diversified across industries with no sector accounting for more than 20% of the pie. This shows the broad appeal of programmatic advertising. As of the end of the second quarter, The Trade Desk had a reach of 87 million households and 120 million CTV devices in the U.S. alone.
Growth stocks have had a rough start to 2022, and The Trade Desk is not immune to this. The stock currently trades more than 30% off its 52-week high. Because of this drop, the company trades at a forward price-to-sales (P/S) ratio of 18.5 based on 2022 estimates. Considering the company's growth rate and massive potential, this is not unreasonable. In fact, the company spent much of 2021 trading at a forward P/S ratio well above 20.
The case for PubMatic
PubMatic is an exciting up-and-coming adtech company. Its third-quarter earnings release saw revenue jump a whopping 54% year over year. This is thanks in large part to an excellent net dollar-based revenue retention rate (NRR). An NRR over 100% means existing customers are upping their spending with PubMatic faster than any customer churn. For the trailing 12 months that ended with the third quarter, this figure was an astounding 157%. This clearly shows just how much customers value PubMatic's service. It also bodes well for the company's "land and expand" strategy and points to management's competence. PubMatic reports that over 60,000 advertisers are placing ads on its platform. The company sees massive potential in the CTV market and has seen CTV revenue grow seven-fold over the past year.
PubMatic is also GAAP profitable, unlike The Trade Desk. The company posted $13.5 million in net income on just $58.1 million in revenue in the third quarter, good for a 23% net margin. That is impressive for a company still growing this fast.
The company trades at very reasonable valuation multiples too, considering its growth. The forward price-to-earnings (P/E) ratio is just under 33, while the P/S ratio is less than five. Still, not everyone is a believer in the stock. PubMatic has historically had a high amount of short interest, and the stock price has seen highs near $77 per share and lows near $21 per share over the last year. It's important to remember this business is still in its early stages and subject to massive price swings. It's also thinly traded, which can increase volatility.
Which stock is best will ultimately depend on your risk tolerance. PubMatic has massive upside potential but is also quite risky given its size in an industry dominated by huge players. One question is whether it will have sufficient capital to continue to compete. At the last report, the company had just $137 million in cash and short-term investments on hand. Also, while PubMatic's revenue percentage gains are excellent, it's not growing nearly as fast as The Trade Desk on a dollar-to-dollar basis. On the other hand, the Trade Desk is a juggernaut of a company that's expected to produce nearly $1.2 billion in revenue for full-year 2021. At this time, The Trade Desk presents a better risk-reward profile for long-term investors.
