The Trade Desk (TTD 0.85%) is on fire. Amid global economic uncertainty, many advertising technology companies reported slowing growth in the second quarter of 2022. Even Alphabet's (GOOGL 0.35%) (GOOG 0.37%) core Google search and YouTube advertising empires -- absolute essentials for marketers making the switch to digital formats -- reported a big slowdown in revenue growth. But not The Trade Desk. Its pace of growth so far this year implies it's scooping up tons of market share.
The Trade Desk co-founder and CEO Jeff Green attributes at least part of his company's success to the increasing scrutiny Google is coming under. With government regulators and marketers alike taking a hard look at the internet search monopoly's ad business, could Google's pain be The Trade Desk's gain?
Google's unfair marketplace means connected TV is open range
Before taking shots at Google, let's first acknowledge one thing: Google's advertising business is no slouch. It's an absolute titan in this space, it's highly profitable, and in spite of economic issues, it's still growing. Total Google advertising revenue was $56 billion in the second quarter of 2022, up 12% year over year. It generated operating profit margins of 36%. If you're looking for a rock-solid business to counteract stock market uncertainty this year, this is a fantastic stock.
But as The Trade Desk has been proving for years, Google isn't the only game in town anymore. For marketers looking for new digital advertising outlets, there's a choice -- and The Trade Desk is clearly a top option. Its revenue soared 35% year over year in Q2, building on the 101% increase it notched in the same period last year. Co-founder and CEO Jeff Green attributes most of this growth to the fast migration from traditional TV to internet-connected TV (CTV).
But during the Q2 earnings call, Green also took the opportunity to point out some issues with Google's "walled garden." What's a walled garden? Google operates a two-sided marketplace. It serves the sell-side (publishers) as well as the buy-side (marketers that want to buy ad space from publishers). But more than that, it also competes with both the sell-side and the buy-side since it owns its own media properties (YouTube, for example). Thus, Google often cuts deals that are highly favorable to itself and less so to its publisher and marketer customers.
But because it's Google, a near-monopoly on internet search itself, advertisers and publishers put up with these less-than-favorable terms. However, Green said on the earnings call that a combination of Google's unfair marketplace and ad services and regulatory scrutiny of some potentially anti-competitive activity has the ad industry rethinking its game plan.
Right now, this is especially playing out on CTV. More than 40% of The Trade Desk's business is from CTV -- streaming services like Walt Disney's Disney+ and the like. It's still early days for this space. But eventually, changes in television that are favoring The Trade Desk could spill over into other ad formats too. Green thinks this provides his company and its leading platform for the buy-side (and the buy-side exclusively) of the ad-tech space with lots of tailwind for many years.
There will be lots of winners in this race
However, this doesn't mean Google is doomed. In fact, as more traditional ads migrate to digital, Google is still one of the first places marketers look to get their new campaigns running.
Alphabet itself provides a counterpoint to The Trade Desk's argument. CEO Sundar Pichai rattled off a number of new deals merchants and other businesses signed with the company last quarter, as well as expanded existing partnerships. Pichai also listed a few ways Google ads are deeply ingrained into Google services and software -- from Search itself to cameras, shopping, cloud data, and more. This kind of depth and breadth of ad formats and offerings won't be dislodged anytime soon.
Basically, Alphabet's ad empire isn't the high-growth story it was in the past. The Trade Desk has usurped the growth title among ad-tech companies with its work in CTV in particular. But extra scrutiny of Google's business doesn't mean this isn't a fantastic stock to own for the long haul. In fact, owning The Trade Desk as it outpaces peers and owning Alphabet for its slower-but-steady business makes a lot of sense right now. Both businesses could still have a lot to gain in the years ahead as digital marketing continues to supplant traditional ads in the next decade. And owning both provides some portfolio diversification within the ad-tech space.
