The annual spending on digital ads around the world is expanding quickly. In 2021, there was an estimated $439 billion spent globally on digital ads, and that is expected to be worth $627 billion by 2024. With such a rapid increase in spending, advertising technology (adtech) companies, which help publishers and advertisers manage their digital ad business, are poised to benefit.
Digital advertising is quickly becoming a preferred method -- as opposed to other techniques like billboards -- because of the advantages it brings to both advertisers and publishers. Advertisers get better information on viewership and engagement to apply to their future ad campaigns. Publishers also learn what types of consumers visit their site, so they can charge a premium to advertisers looking to reach that specific audience. The Trade Desk (TTD 0.70%) and PubMatic (PUBM 2.59%) are both leaders on different sides of the adtech space, and there is room for both companies to succeed. But which is a better buy?
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The Trade Desk
The Trade Desk works on the buy-side of the adtech space, as opposed to the sell-side, where PubMatic operates. The buy and sell sides do not compete with each other, but rather work together to create a better experience for everyone. The Trade Desk looks to help advertisers reach their target audience as efficiently as possible, while sell-side players help the publisher make the most money on their ad space. The Trade Desk is the leader of the buy-side, and with no significant competitor, it has seen much success.
One of the reasons it has been able to excel is because of its impressive lineup of partnerships. The company has partnered with PubMatic, Magnite -- another sell-side leader -- and hundreds of individual publishers to give advertisers as many options as possible.
The company also collects data from every transaction made on its platform by advertisers, and it gives this data to its customers to make better-informed decisions. This influx of extensive data on viewership and engagement makes The Trade Desk more valuable. With more value comes more activity, which creates more data. This virtuous cycle has turned the Trade Desk into an industry leader, and with $6.2 billion in ad spending running through its platform in 2021, it would be extremely difficult for a competitor to stand up to the Trade Desk.
The result of this market dominance is nothing short of spectacular. The company generated $1.2 billion in revenue in 2021, which grew 43% year over year, and almost 12% of that became net income. Additionally, the company generated over $318.5 million in free cash flow in 2021.
Despite this market dominance, the company has room to grow. The $6.2 billion that was spent on its platform only represented 1.4% of the total digital ad spend last year, meaning that the company could continue growing rapidly. At roughly 28 times sales, the Trade Desk is not cheap, but considering its strong profitability, potential, and leadership, it might be worth paying up for.
PubMatic
As mentioned before, PubMatic focuses on helping the publishers. The company has seen major adoption in 2021: Its revenue soared 53% year over year to $227 million, and this was likely driven by the 92 trillion impressions it enabled during the year, an increase of 96% over the prior year. As a result, the company now has a market share between 3% and 4%, and it sports a free cash flow margin of 22%. Considering that PubMatic's market capitalization is just $1.2 billion, this cash generation is very impressive.
That being said, competition is much tougher on the sell-side than on the buy-side. PubMatic faces pushback from Magnite, but there is one key edge that PubMatic has: Its growth is completely organic, while Magnite is buying its adoption through acquisitions. This could imply something about the difference in quality between services.
Both PubMatic and Magnite, however, face headwinds. The Trade Desk offers OpenPath, a solution that allows large publishers to find advertisers themselves, cutting out the need for sell-side services. While OpenPath is not a direct competitor to these platforms because it doesn't offer price optimization or other services, it does put pressure on this market.
The winner: The Trade Desk
The Trade Desk is a better buy for two reasons. First, its strong network effects decrease the risk of the company being overthrown in the space. Second, this company is the far-and-away leader on the buy side, yet it still has plenty of growth opportunities. With that combination, investors get the potential of a young company with the stability of an industry leader.
However, my best idea would just be to buy both. The adtech space is heating up, and both companies are ready to capitalize. Both PubMatic and The Trade Desk are generating tons of cash, meaning that they will be able to innovate to flourish over the coming decade.
