Programmatic advertising-technology (adtech) company The Trade Desk (TTD 1.67%) says, "There is a fundamental shift happening in advertising." Recent commentary from Coca-Cola (KO) management perfectly illustrates the fundamental shift it's talking about.
As one of the biggest consumer goods companies in the world, Coca-Cola naturally spends a lot of money on advertising. But in the third quarter of 2023, management shared a surprising statistic: In 2019, 30% of its media spend was dedicated to digital media. In comparison, it spent a whopping 60% on digital channels through the first three quarters of 2023.
In just three years, Coca-Cola has essentially doubled the money it's spending on digital advertising. This is the fundamental shift that The Trade Desk has harped on for years, and it has big implications for investors.
Why is advertising fundamentally shifting?
Coca-Cola knows how much it's spending on digital advertising and why. According to CEO James Quincey, members of the Gen Z generation spend seven to nine hours on screens every day. They aren't spending nearly that amount of time watching traditional TV.
Quincey isn't necessarily saying that Gen Z streams that much video content. After all, screen time takes many forms, including video, gaming, social media, and more. But seven to nine hours of daily screen time demands a shift in advertising strategy to reach them. That's why Coca-Cola is spending more on digital than ever before.
It's not just Coca-Cola -- virtually all companies are finding themselves in this same situation. And they're increasingly turning to The Trade Desk to help solve the problem.
The Trade Desk partners with advertising agencies and brands to help them buy available digital ad slots -- that's why it's called a buy-side (or demand-side) adtech platform. However, the company also enables programmatic advertising, which is significant.
In the past, almost everyone could be reached the same way -- there were only so many broadcast TV stations. Today, Gen Z is on their screens more than ever. But that screen time is spread out among a lot of services and platforms. Therefore, advertisers have a really hard time making sure they reach the people they're trying to reach.
This is where The Trade Desk's programmatic advertising comes in. Advertisers can determine which demographics they want to reach and only display ads to them. In theory, two people could be viewing the same digital content but see two completely different ads. Therefore, advertisers waste less and hopefully achieve better results.
What it means for The Trade Desk's stock
Brands are shifting spend from traditional methods to digital channels via programmatic advertising at an incredible pace. This is why The Trade Desk's growth consistently outpaces the industry.
For example, The Trade Desk continues to grow quarterly revenue at more than 20% year over year. That's slowed considerably from its peak growth rate, as the chart below shows. But in the past year, growth has slowed considerably for all adtech companies. The Trade Desk's growth continues to outpace most, which is encouraging.
TTD Revenue (Quarterly YoY Growth) data by YCharts
The Trade Desk is a high-growth company, and it still has plenty of room to grow. In 2023, it's on pace to generate just shy of $2 billion in full-year revenue. This is a small percentage of what management believes is an $830 billion (and growing) global opportunity.
The Trade Desk stock isn't cheap -- it trades at a price-to-sales (P/S) ratio of about 18, whereas many stocks trade at a fraction of that valuation. However, the opportunity is large, and the company is growing fast. Coca-Cola and others are shifting dollars toward digital media at an impressive pace, and the shift is ongoing. That's why investors should consider buying The Trade Desk stock, even at its more pricey valuation.
