The Trade Desk (TTD 1.67%) and PubMatic (PUBM 1.75%) represent two different ways to invest in the digital advertising market. The Trade Desk is a demand-side platform (DSP), which enables advertisers to automatically buy ad space across desktop, mobile, and connected TV (CTV) platforms. PubMatic is a sell-side platform (SSP), which helps publishers sell their own ad inventories.
The Trade Desk and PubMatic sit on opposite ends of the ad supply chain, but they're both independent platforms that don't lock publishers and advertisers inside the "walled gardens" of proprietary ecosystems the way that Alphabet's Google and Meta Platforms' Facebook and Instagram do. That makes them compelling choices for buying and selling ads across the open internet of websites and apps that aren't locked into those sprawling tech ecosystems.
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But over the past 12 months, The Trade Desk's stock rallied more than 30% as PubMatic's declined by about the same amount. Let's see why the DSP outperformed the SSP by such a wide margin, and if it will remain the better long-term investment on the digital advertising market.
The Trade Desk continues to flourish in a tough environment
The Trade Desk's revenue grew 26% in 2020, even as the pandemic curbed the market's demand for digital ads. Its revenue rose 43% in 2021 as those headwinds dissipated, then grew another 32% in 2022 even as inflation, rising interest rates, and Apple's privacy-related iOS update disrupted the ad market.
The Trade Desk continued to flourish in a tough market for three reasons. First, its CTV platform remained resilient and expanded at a faster clip than its PC and mobile platforms as more streaming video platforms rolled out ad-supported tiers.
Second, it expanded Solimar, its new AI-powered platform that leverages first-party data to place ads more effectively while countering Apple's restrictions on third-party data.
And third, it's still the world's largest independent DSP, and that scale enabled it to resist the macro headwinds more effectively than a lot of its smaller ad tech peers.
The Trade Desk also continues to lock in its advertisers with new features like Unified ID 2.0, which eliminates the need for invasive third-party cookies; and OpenPath, a tool that bypasses SSPs to directly connect advertisers to publishers.
Analysts expect The Trade Desk's revenue to rise 23% to $1.95 billion this year as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grow 15% to $765 million. But based on its enterprise value of $38.8 billion, it might seem a bit pricey at 20 times this year's sales and 51 times its adjusted EBITDA.
PubMatic faces more-pressing problems
PubMatic's revenue rose 31% in 2020 as the strength of its CTV business carried it through the pandemic, and grew another 53% in 2021. But in 2022, its revenue rose just 13% as its dollar-based net retention rate (which gauges its year-over-year revenue growth per customer) dropped below its pre-pandemic levels.
PubMatic faces a tougher slowdown than The Trade Desk for three reasons. First, it's still an underdog that is actually growing slower than Magnite, the world's largest independent SSP. Second, the weakness of PubMatic's PC and mobile businesses is consistently offsetting the steady growth of its CTV business.
And third, many SSPs are struggling more than DSPs in this challenging environment as publishers try to sell their ad inventories across different exchanges. DSPs are generally faring better because they're only helping advertisers buy up advertising space across multiple exchanges instead of trying to unload unsold ad inventories.
For 2023, analysts expect PubMatic's revenue to decline 1% to $253 million as its adjusted EBITDA drops 37% to $62 million. But it expects two new features -- Activate and Convert -- to expand its total addressable market by more than $75 billion over the long term. Activate enables buyers to execute direct deals instead of bids, while Convert is a unified platform for retail and commerce customers to focus on both monetization and optimal acquisition strategies at the same time.
With an enterprise value of $484 million, PubMatic looks cheap at two times this year's sales and eight times its adjusted EBITDA. But for now, investors probably won't pay much of a premium for its stock until its growth accelerates again.
The obvious winner: The Trade Desk
The Trade Desk's stock is pricier, but its superior scale, better diversification, and stronger growth rates all make it a more compelling investment. PubMatic will likely stay in the penalty box unless it proves it can overcome its near-term challenges.
