I've been slowly whittling down my various investments in advertising-technology platforms over the last few years. Around this time in 2022, I parted ways with Magnite (MGNI 4.43%). This late summer/early autumn, it will be PubMatic (PUBM 1.75%), leaving me with just one pure-play advertising-platform stock remaining: The Trade Desk (TTD 1.67%).
Here's why I'm refocusing on just The Trade Desk, not including big tech stocks, which all have their own digital-ad platforms.
Not just growth but profitable growth in uncertain times
The digital-ads industry works much like any other type of market. There's a seller and a buyer, and someone in the middle helps connect the two to make a sale. Magnite and PubMatic are both sell-side platforms -- meaning they work with publishers to list ad inventory for sale. By contrast, The Trade Desk works on the buy-side with marketers looking to purchase and place ads.
This is a crowded space in the software industry and rightfully so. The Alphabet and Meta empires were built servicing both the supply- and demand-side of the digital-ad equation. With each hauling in tens of billions of dollars every quarter, it's no surprise that a lot of upstart software companies would try to take a piece of the pie.
The Trade Desk has been at it for a while, co-founded in 2009 by Jeff Green (CEO) and David Pickles (CTO), both of whom have worked in the digital-ad space a long time. I've been a fan of the company's demand-side focus for years, but I thought the highly fragmented supply-side could consolidate around a scrappy upstart leader too. So far, that hasn't happened.
For one thing, many big publishers utilize their own software to manage their inventory, which creates difficulty for supply-side platforms. But I also long underestimated this point that The Trade Desk makes in its annual filings, which I cited earlier this year:
We focus on buyers since they control the advertising budgets. Also, the supply of digital advertising inventory exceeds demand, and accordingly, we believe it is a buyer's market. We also believe that by aligning our core offerings with buyers, we are able to avoid conflicts of interest that exist when serving both the buy side and sell side. This focus allows us to build trust with clients, many of whom leverage their proprietary data on our platform. That trust and ability to use their own data on our platform, without worrying about it being used by other participants, enables our clients and their advertisers to achieve better results. This trust provides us with the benefit of long-term and stable relationships with our clients.
In other words, market forces are likely to continue making life difficult for supply-side platforms. And The Trade Desk has differentiated itself among its marketer customers, as well as publishers that want to strike a direct deal for their ad inventory on The Trade Desk's platform, as a go-to partner. This difference has increasingly become apparent in the financials for The Trade Desk, compared to sell-side peers Magnite and PubMatic, which face stalling growth and a struggle to reach robust profitability.
Data by YCharts.
A new secular growth leader with few to challenge it
The Trade Desk's results have been a particular standout so far in 2023 amid global economic uncertainty. When times get tough, advertising budgets are often the first thing to get slashed when companies look to conserve cash.
Despite economic fears, though, The Trade Desk's revenue is up 22% through the first half of 2023 to $847 million. Net income according to generally accepted accounting principles (GAAP) was $42 million (due to Green's executive stock-based compensation plan), but on an adjusted basis, net income was up 25% to $254 million.
Free cash flow has been very good so far this year too, coming in at $312 million. The Trade Desk used all of it and a little extra, $318 million, to repurchase stock and more than offset the effects of that stock-based compensation. The company is in fantastic shape to continue returning excess cash to shareholders too with over $1.4 billion in cash and short-term investments and zero debt.
The Trade Desk has emerged as a secular growth leader in the digital-ads ecosystem, successfully taking the fight to big dogs like Google and Facebook. Sure, it's really expensive (over 70 times trailing-12-month free cash flow) but for good reason. By certain measures, Magnite and PubMatic are really cheap, also for good reason. Their business and financial results have been choppy at best.
Data by YCharts.
Nevertheless, growing profitably in good times and bad is more what I'm looking for in a long-term stock, and sell-side platforms haven't been up to the challenge. I've decided to move on from those other players and will renew my focus on The Trade Desk stock.
