Consumer demand weakened in 2022 under the pressure of high inflation, causing many brands to cut their advertising budgets. That headwind hit ad tech giants Alphabet (GOOG 0.83%) (GOOGL 0.87%) and Meta Platforms (META 4.53%) particularly hard in the third quarter.
Alphabet reported 6% year-over-year growth in total revenue, but Google advertising revenue -- which comes from Google Search, YouTube, and third-party web properties -- rose just 3%. Worst yet, Meta Platforms actually saw revenue drop 4% year over year, marking its second consecutive quarterly decline. Both companies blamed the economic environment, but not all ad tech vendors were affected to the same degree.
The Trade Desk (TTD 0.56%) reported 31% year-over-year revenue growth in the third quarter, and CEO Jeff Green says the company gained more market share than at any other point in its history. Moreover, The Trade Desk is well positioned to continue outperforming, and the stock is a screaming buy at its current valuation.
Here is what investors should know.
The Trade Desk is built differently than the competition
The Trade Desk operates a demand-side platform (DSP). Its software leans on artificial intelligence to help marketers plan, measure, and optimize data-driven campaigns across digital channels. The Trade Desk built its DSP on bid-factor-based architecture, a unique system that improves campaign outcomes by enabling marketers to set precise targeting parameters with just a few clicks. Every other DSP is built on line-item-based architecture, a more cumbersome system for targeting ads.
Additionally, The Trade Desk is an independent ad tech company, meaning it does not own any web content, and therefore has no reason to steer ad buyers toward any specific inventory. That eliminates the conflict of interest inherent to businesses like Alphabet and Meta Platforms, both of which have a clear incentive to steer ad buyers toward their own inventory on Google Search, YouTube, Facebook, and Instagram.
In a nutshell, The Trade Desk benefits from an innovative platform architecture and a more transparent business model. Those qualities helped the company keep its customer retention rate above 95% for eight consecutive years, and they made The Trade Desk the leading independent DSP.
Digital advertising is approaching a $1 trillion addressable market
Worldwide digital ad spend is forecast to grow at nearly 10% per year to reach $876 billion by 2026, according to eMarketer. That puts The Trade Desk in front of a massive opportunity, but the company is particularly focused on connected TV (CTV) advertising and shopper marketing.
CTV advertising: Consumers are steadily gravitating toward streaming media, so advertisers are slowly abandoning traditional TV. To that end, CTV ad spend in the U.S. will grow at nearly 20% per year to approach $44 billion by 2026, according to eMarketer, and analysts at BMO Capital Markets estimate that figure could reach $100 billion by 2030.
The Trade Desk sources inventory from every major ad-supported streaming service, including Warner Bros. Discovery's HBO Max, Comcast's Peacock, and fuboTV. Better yet, it recently expanded its partnership with Walt Disney to improve automated ad targeting across Disney-owned content. That is particularly exciting because an ad-supported tier of Disney+ is set to launch in early December, though the benefits also extend to Hulu, ESPN, and other properties.
The Trade Desk allows advertisers to reach consumers through a variety of channels, including desktop, mobile, and audio, but CTV was once again the fastest-growing segment of its business in the third quarter.
Shopper marketing: Search giant Google sparked the first wave of digital advertising, social media mogul Meta Platforms powered the second wave, and retailers are driving the third wave. Retail ad spend in the U.S. is expected to grow at 22% annually to reach $61 billion by 2024. But some analysts say shopper marketing will ultimately be the biggest of the three waves, meaning it could eventually top search and social ad spend.
More than 80% of the largest retailers in the U.S. partnered with The Trade Desk, including Albertsons, Target, and Walmart. Those partnerships went live less than a year ago, but they are already bearing fruit. The Trade Desk saw shopper marketing spend nearly triple between the second and third quarters this year.
The bull case is clear and the price right
The bull case for The Trade Desk is straightforward: The company operates the largest independent DSP in the ad tech industry, a position it earned due to its transparent business model and capacity for innovation. Aside from its platform's unique architecture, The Trade Desk also created the "world's most advanced data marketplace," according to Green. That helps marketers target their ads more effectively, which ultimately drives more clicks and conversions. Those advantages should keep The Trade Desk at the forefront of the ad tech industry.