The Trade Desk has been showing off the superiority of its business model the last couple of years. Despite aftereffects of the pandemic and worry over global recession that has sent digital ad revenues in decline among many tech companies, The Trade Desk's focus as a demand-side platform that works primarily with marketers has proven superior to the myriad of supply-side platform stocks out there (including Magnite and PubMatic).
Data by YCharts.
But there's another way to play digital ads besides The Trade Desk and other tech giants it competes with. Enter software companies DoubleVerify (DV 0.30%) and Integral Ad Science (IAS 2.32%).
A non-marketplace platform take on digital ads
The advertising industry works much like any other marketplace: There are buyers and sellers, and someone in the middle connecting the two. In this case, it's increasingly The Trade Desk that's helping marketers and the companies they represent buy ads from the inventory of publishers with ad inventory for sale.
But there's more to this connective tissue between ad buying and selling. Niche software services have wormed their way into every corner of the economy, and global marketing is no exception. This is the space DoubleVerify and Integral Ad Science (IAS) harbor, offering software services that help boost both the efficiency of ad campaigns and the yield (amount of revenue from selling an ad) for publishers.
There is lots of overlap between these two, to the point they can be considered straight-up competitors. Both offer services that protect ad campaigns from fraudulent activity, measure the suitability of an ad's placement, and ensure an ad can be viewed on a web page or video. DoubleVerify and IAS also both had their IPO in 2021 during the cloud computing boom. I nibbled a bit of DoubleVerify, including a bit in late 2022 during the bear market, owing to the company's slightly larger scale, resulting higher profitability, ample cash, and no debt.
Data by YCharts.
IAS also relies a bit more on the slower-growth supply-side ad publishers for sales (14% of revenue in the second quarter of 2023, versus 8% for DoubleVerify). DoubleVerify has more large enterprise marketer customers as well, which has also equated to a bit of outperformance in revenue (22% year-over-year sales growth to $134 million in Q2, versus 13% for IAS to $114 million).
Are these two stocks a buy?
Differences aside, DoubleVerify and IAS shares have moved mostly in lockstep since their IPOs, and that's likely to continue for some time given similar business performance. Personally, though, I still favor DoubleVerify right now because of its big net cash position on the balance sheet and slightly higher revenue growth rate.
That being said, IAS seems like the "value" stock here, currently trading for 49 times Wall Street analysts' expectations for 2024 earnings per share and just 17 times expected free cash flow, to DoubleVerify's 59 times expected earnings and 31 times expected free cash flow.
However, at this point, I'm not buying either stock. There's no shortage of competition for small niche software companies, including from big tech giants like Alphabet's Google and Meta's Facebook and Instagram using AI to get more efficient at delivering ads. I expect DoubleVerify and IAS shares to remain highly volatile for now.
Nevertheless, both companies remain on my watch list, and I'm content with my very small DoubleVerify position. In the meantime, it's the digital ad industry pure-play leader The Trade Desk that has real momentum as it gains power against the established digital ad industry giants.
