Shares of programmatic advertising software company The Trade Desk (TTD 4.98%) fell on Thursday, declining 5.1% on the day.
The Trade Desk has had a very difficult time over the past few years, as several Magnificent Seven digital advertising giants have threatened its market share. At the same time, its ad agency clients have expressed displeasure at what they deem excessive fees.
Thus, investors were likely very unhappy to hear that one sell-side analyst believes more headwinds will emerge as lower-cost AI-powered media-buying tools pressure The Trade Desk's take rate.
NASDAQ: TTD
Key Data Points
20% take rates under threat
The Trade Desk has positioned itself as a "neutral" programmatic advertising company by not operating its own ad-selling platform, such as a search engine, social media platform, or e-commerce marketplace, thereby avoiding the conflicts of interest it says are inherent in using the tools from the digital ad giants.
However, over the past few years, the big digital advertising tech giants have begun offering programmatic buying services for little to no cost, since they also make money by selling the ads themselves. That has put pressure on The Trade Desk, and has also likely led to audits and public spats with the company's ad agency customers over fees.
Today, sell-side analyst Bianca Dallal at Rothschild & Co Redburn initiated coverage of The Trade Desk with a "Sell" rating and a $11 price target, which would be over 50% below yesterday's closing price.
Dallal believes that continued AI improvements to media-buying tools offered by the big tech giants for little or no cost will further pressure The Trade Desk's "take rates," it charges advertisers, which Dallal estimates stand at roughly 20% today.
Competing with near-zero take rates is difficult to begin with, especially if one is starting at 20%. While The Trade Desk can likely make a case that its "neutral" platform offers customers better value by not directing ads to its own search, social media, or e-commerce platforms, the question is: how much value does that "neutrality" provide? Is it a difference 20%?
Image source: Getty Images.
The Trade Desk's growth is slowing
Last quarter, The Trade Desk's revenue growth slowed to 12%, less than half the 25% growth rate of the prior year quarter, while adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margins compressed from 34% to 30%. That appears to be evidence of pricing pressure, which is no doubt a concerning trend.
Nevertheless, The Trade Desk now looks pretty reasonably priced at 20 times next year's earnings estimates, with over $1.4 billion in cash and no debt. So, it's hard to see a case for the stock being cut in half again.
That said, growth and pricing headwinds should remain an overhang for investors until the company finds a way out of this predicament, so investors also probably shouldn't anticipate a big recovery any time soon.
