The Trade Desk: Positioned For Success As A New Era Of Digital Advertising Starts (Rating Upgrade)

seekingalpha06-18

Trade Desk is a cloud-based ad-buying platform that exceeded revenue and earnings expectations in its Q1 FY24 earnings report while outperforming the S&P 500 and Nasdaq 100 YTD.The strength in revenue...

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For Success As A New Era Of Digital Advertising Starts (Rating Upgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-18 15:17 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4699756-the-trade-desk-stock-positioned-success-new-era-digital-advertising-starts-upgrade-buy><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Trade Desk is a cloud-based ad-buying platform that exceeded revenue and earnings expectations in its Q1 FY24 earnings report while outperforming the S&P 500 and Nasdaq 100 YTD.The strength in revenue...</p>\n\n<a href=\"https://seekingalpha.com/article/4699756-the-trade-desk-stock-positioned-success-new-era-digital-advertising-starts-upgrade-buy\">Source 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Roku, while building a new approach to audience-based buying on Kokai.Given the robust product innovation, secular growth vectors and financial discipline, I believe TTD stock is positioned to drive upside from its current levels, making it a \"buy\".Urupong Introduction & Investment Thesis Trade Desk (NASDAQ:TTD) is a cloud-based ad-buying platform that helps ad buyers such as brands and advertising agencies create, execute, measure, and optimize targeted ad campaigns across ad formats and channels that include Connected TV (\"CTV\"), display, and audio, among others. The company has outperformed the S&P 500 and Nasdaq 100 YTD. I initiated a \"buy\" rating on the stock on March 22, and my thesis was predicated on my belief that with secular growth drivers such as CTV, audio, and retail media, Trade Desk is well positioned to drive advertising spend on the platform as it enables its clients to build targeted campaigns that drive superior returns on ad spend, along with the adoption of Unified ID 2.0 (\"UID2\"). Since the time of my writing, the stock is up close to 15%, outperforming the indices. The company reported in Q1 FY24 earnings where it grew its revenue and earnings by 28% and 48% YoY, respectively, exceeding expectations. The strength in its earnings report was driven by continuous growth in CTV and retail media, as advertisers are increasingly valuing premium inventory on the open internet, allowing them better targeting through UID2 adoption and ROI on ad spend. During the quarter, the company continued to build robust relationships with the world's leading publishers in order to boost the quality of its inventory. I believe that the company is well positioned for long-term success given its robust product innovation on its Kokai platform, especially as we see a growing shift in the digital advertising space from advertisers shifting their budgets away from walled gardens of Meta (NASDAQ:META) and Google (NASDAQ:GOOG) towards premium inventory. While there could be short-term volatility in the stock price, I believe that the management's vision and execution with a laser-sharp focus on profitability will drive long-term upside to the stock price. Assessing both the \"good\" and the \"bad,\" I believe there is still an upside of approximately 24%, making it a \"buy\". The good: Strong growth in CTV and retail media as advertisers shift their spend towards premium inventory, Robust Product Innovation & Financial Discipline Trade Desk reported its Q1 FY24 earnings where revenue grew 28% YoY to $491M driven by strong growth in CTV and retail media as advertisers shift their spend on premium inventory with the company building the new identity and authentication fabric of the internet with UID2 and further innovating on their Kokai platform to enable their customers to leverage data-driven buying to deliver superior return on investment on their ad dollars. Q1 FY24 Earnings Slides: Robust revenue growth During the earnings call, the management discussed at length that the majority of the digital ad spending took place outside of Meta and Google in 2022, with the consensus shifting to the open internet, or \"premium internet.\" This is how the management explains what \"premium internet\" actually means.  No one watches Mandalorian or Curb Your Enthusiasm or March Madness casually. No one listens to their favorite podcast passively. I found in every aspect of my life, I can't talk to anyone about premium CTV content or the best of music without people sharing a passion for some form of those mediums. We are all highly invested in it. That's very different from how consumers engage or talk about social media content, which is often short-form UGC video such as cat videos or 14 year-olds filming themselves falling off of bicycles.\"  Given the proliferation of CTV and retail media and Trade Desk's innovation with Kokai, it has built a curated marketplace that represents the premium internet, which advertisers can access at scale without having to give up control of their first-party data. As Trade Desk builds up its inventory by building robust relationships with the world's leading publishers that include Disney (NYSE:DIS), NBCU, Roku (NASDAQ:ROKU) and others, advertisers have more incentives to shift their spending towards Trade Desk, where they have access to premium content across major networks and ad-supported streaming services, with superior control of future outcomes. Simultaneously, the company is also bringing to market a new approach to audience-based buying, enabling advertisers to attract and acquire new customers based on attributes from their existing loyal customer base, which is possible because of the broad availability of UID2 identifiers. The management gave the following customer example with Unilever (NYSE:UL) during the earnings call, and I believe this will be game changing for improving ROI on ad spend, especially at a time when there is persisting global macro uncertainty and corporate budgets are under greater scrutiny. In Asia, Unilever and their agency, PHD, leveraged our retail data partnership in Kokai with FoodPanda, to increase sales of their Knorr food sauces. Unilever was able to onboard its own first-party data into our platform, then do look-alike modeling using FoodPanda's retail conversion and loyalty data to target new customers more precisely on the open internet.\" While the above initiative has resulted in a 229% improvement in customers adding Knorr products to their shopping basket, coupled with an 81% increase in conversion rate, this means that advertisers will increasingly adopt UID2 to increase their chances of reaching their target audience with a higher conversion rate. I believe this positions Trade Desk for long-term success, especially as advertisers shift their ad dollars from walled gardens to the open internet to get access to competitive markets with price discovery, while making the most of every advertising dollar. Further, the company is also seeing international growth outpacing North America for five quarters in a row, contributing 12% to Total Revenue in Q1. As the management continues to execute their growth playbook led by CTV and retail media in international markets, it should act as a growth vector for the coming quarters and years. Shifting gears to profitability, the company generated $162M in Adjusted EBITDA, which represents a growth rate of 48% YoY, with a margin of 33%, an improvement of 500 basis points from the previous year. This was achieved by streamlining its operating expenses, which grew 13% YoY on a GAAP basis, which is at a much slower rate than overall revenue growth, allowing the company to gain operating leverage. I also believe that the company's financial discipline is enabling it to continue its pace of product innovation to position itself to win, especially as we likely see a disruption in the ad landscape from spending shifting from walled gardens to the open internet. Q1 FY24 Earnings Slides: Growing profitability The bad: If it loses publishers or is unable to attract new publishers, the quality of inventory will suffer. Plus, the extent of cookie deprecation of top-line is still unknown While there is increasing evidence of ad dollars moving away from walled gardens of Google and Meta, which own over 50% of global digital advertising market share, towards demand-side platforms like Trade Desk, which offer premium inventory with a higher return on ad spend for advertisers, the success of the platform is dependent on how well it can continue to grow its network of publishers to boost the quality of its inventory. Simultaneously, it also requires both publishers and advertisers to adopt UID2 to effectively take advantage of the audience-based buying capabilities of the Kokai platform. While the adoption of UID2 has been great according to management's expectations, the uncertainty around third-party cookie deprecation on its growth trajectory is yet to be seen. Revisiting my valuation: Trade Desk remains a \"buy\" Since the management hasn't provided full FY24 guidance, I will take the consensus estimates for revenue growth over the next 3 years into FY26, where revenue is expected to grow in the mid-twenties range in FY24, followed by a growth rate in the low-twenties range over the next 2 years, thus generating $3.5B. I believe this is achievable, especially as we see advertisers shift their ad spend away from the walled gardens of Meta and Google towards Trade Desk in order to get access to higher quality inventory on Connected TV and retail media through UID2 adoption, allowing them to reach the right audience at the right place at the right time, driving an improved conversion rate and ROI on ad spend. From a profitability standpoint, the company had generated Adjusted EBITDA margins above the 40% range consistently over the last 3 fiscal years. Therefore, assuming that the management can continue to execute with the current state of financial discipline while simultaneously driving product innovation, it should be able to generate $1.58B in Adjusted EBITDA in FY26 with an Adjusted EBITDA margin of 45%, which will be equivalent to a present value of $1.3B when discounted at 10%. Taking the S&P 500 as a proxy, where its companies grow their earnings on average by 8% annually over a 10-year period with a price-to-earnings ratio of 15-18, I believe that Trade Desk should be trading at least 2.5 times the multiple, given the growth rate of its earnings during this period of time. This will translate to a PE ratio of 45 or a price target of $120, which represents an upside of 24%. Author's Valuation Model My final verdict and conclusion  There is no doubt that Trade Desk has executed brilliantly thus far in a complex macroeconomic scenario. Moving forward, I believe that there are undeniably large growth vectors that include CTV, retail media, and international expansion that will propel the company forward, as we see it enter a new era of digital advertising spend, one where advertisers want access to premium inventory on the open internet to drive better targeting and conversion rates on their ad spend through increased UID2 adoption. I believe the stock is attractively priced from a risk-reward standpoint at current levels and should drive sizable upside over a 3-year investment horizon, making it a \"buy\".","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2444488059"}