The stock market is in a tailspin, and pessimism is dominating the headlines. The overall negative tone is also setting some broad narratives, and one such narrative is that the advertising sector is about to fall off a cliff as the economy slows down. Sure, ad budgets draw major scrutiny during tougher environments, but that doesn't spell doom and gloom for every single company in the industry.
One company especially well positioned not only to withstand a difficult economy but also to extend its lead in the long run is The Trade Desk (TTD -1.95%). So, while many are getting scared by the market's messaging, there are three key reasons smart investors should take a closer look at the company.
1. A relatively resilient business model with secular tailwinds
The Trade Desk operates a programmatic advertising platform that empowers its customers -- typically the marketing departments of companies and ad agencies -- to get in front of the right audiences at the right times. The Trade Desk allows users to maximize returns on their advertising investments and has been a leader in the programmatic advertising space. The company generates revenue by charging its clients a percentage of their total spend on advertising via its platform.
Advertising is a massive market with global spending reaching about $750 billion in 2019, according to IDC. With the shift in consumers' preferences to mobile, smart TVs, and other digital media, the advertising dollars are also shifting to digital channels. Statista projects 82% of total advertising dollars will be spent on digital by 2027, and an incredible 84% of that digital advertising revenue will come through programmatic advertising platforms.
While the "walled gardens" of advertising -- mainly tech giants like Alphabet, Meta Platforms, Amazon, and Microsoft with proprietary web and mobile apps -- will likely garner a big share of that programmatic ad spend, everything outside the walled gardens is an open opportunity. The Trade Desk is a prime candidate to capture it.
With looming uncertainty around the economy, businesses are turning every stone to optimize their costs, and adoption of a programmatic ad platform seems like a compelling choice. So while there is no such thing as a recession-proof business, The Trade Desk's focus and leadership in this category make it a relatively resilient business.
2. A forward-looking organization with a leading tech platform
Founded in 2009, The Trade Desk was able to establish an early lead. CEO Jeff Green's two decades of experience in the advertising technology industry have been a key driver for the company. While its early start gave The Trade Desk a solid advantage, the company has done a great job in extending that lead with consistent investments to evolve its platform.
As a recent example, after two years of product development effort, The Trade Desk unveiled its next-generation platform Solimar in 2021. Solimar's simpler onboarding process, advanced targeting capabilities, effective campaign tracking, and powerful user experience make it easier to adopt and stickier with customers.
For years, advertisers have relied on "cookies" -- small pieces of data placed on users' devices by the websites they visit so sites can track the users' browsing habits, general interests, shopping preferences, etc. To better protect consumers' privacy, Alphabet announced a few years ago that it planned to retire the support of cookies from Google Chrome by the end of 2024. This shook up the advertising industry as Chrome is the world's leading web browser with over 67% market share in 2022.
Removing the support for cookies would impair advertisers' ability to effectively target customers. The Trade Desk foresaw the downstream impacts of this change and came up with the concept of Unified Identifier (Unified ID 2.0) -- a unique encrypted user identifier that helps advertisers in presenting relevant advertisements to potential customers while protecting their privacy. The company rallied industry partners to increase the adoption of the new Unified ID 2.0 framework, setting up the advertising ecosystem for a cookie-less world.
The Trade Desk is not just another typical advertising company. It is a leading tech platform that is setting standards for the industry.
3. Numbers underscore the story
The Trade Desk's platform has resonated with customers, and the company grew its revenue tenfold from 2015 to 2021. Even in a contracting economic environment, the company increased its second-quarter 2022 revenue 35% year over year.
About 95% of that revenue came through longer-term master services agreements, meaning it is relatively reliable and recurring. And unlike many other fast-growing companies, The Trade Desk has been free-cash-flow positive since 2016. As of June 30, The Trade Desk had over $1.2 billion in cash and short-term investments with no debt giving it further financial resilience.
Investors are fretting over the near-term prospects of the advertising sector, but with Jeff Green's leadership, the secular tailwinds for programmatic advertising, the company's early lead, and the superiority of its tech platform, The Trade Desk is positioned very well to continue its dominance for years to come.
The company's shares may still look somewhat expensive on price-to-free cash flow or price-to-sales basis, but they're still much cheaper relative to their three-year averages.
Data by YCharts.
All this means investing in The Trade Desk now will likely yield handsome returns for investors over the long term.
