The Trade Desk

Q2 22’ SUMMARY

The Trade Desk demonstrated immense strength in Q2 22’ that displayed the competitiveness of the company’s business model. While several digital advertising players signaled weakness, particularly the walled gardens, The Trade Desk delivered continued outperformance from market share gains.

The business is essentially capturing opportunity created by two megatrends- advertising dollars shifting from traditional media to digital media and advertising dollars shifting from traditional TV to connected TV (CTV). Neither of these massive consumer behavioral changes show signs of slowing, which positions The Trade Desk to continue building momentum given the platform’s position as the leading demand side platform (DSP).

“We delivered outstanding performance in the second quarter, growing 35% versus a year ago, significantly outpacing worldwide programmatic advertising growth. More of the world’s leading brands are signing major new or expanded long-term agreements with The Trade Desk, which speaks to the innovation and value that our platform provides compared to the limitations of walled gardens.”

— Jeff Green, Co-Founder and CEO of The Trade Desk

Key Takeaways from Q2 22’

Key Takeaway 1- ctv ad spend continues trend of rapid growth

Advertisers are increasingly allocating budget to CTV inventory as they must “follow the eyes”.
The Trade Desk continued to add substantial CTV inventory onto the platform.

Key Takeaway 2- global spend on platform remains robust

The platform generated strong growth across the globe with momentum in the US and headwinds abroad.
The platform generated substantial growth from non-CTV formats, which are video (non-CTV), mobile, audio, and display.

Key Takeaway 3- Digital advertising spend continues to grow

Consumer spending remains high, which means advertisers are heavily incentivized to continue ad spend to reach consumers.
CTV inventory is rapidly increasing as consumers switch to CTV and CTV providers offer AVOD (ad supported CTV), which drives more advertisers into the market thus supporting robust growth.

GROWTH TRENDS

growth Factor 1- strong domestic platform

The Trade Desk drove growth from strength in the domestic market, which did not face the same headwinds as the international markets. Even with the headwinds, business in Europe doubled albeit from a low base.

The domestic platform is much larger than the international platform as the markets have different dynamics in regards to programmatic advertising development as well as CTV adoption rates. Importantly, The Trade Desk is well positioned to accelerate growth in these markets as the significant investments made in developing the business abroad can start bearing fruit once the headwinds fade.

The international markets were impacted by headwinds related to macro issues being experienced in EMEA and APAC:

The EMEA markets are facing geopolitical tensions from the Russian invasion of Ukraine, which has resulted in energy inflation as well as heightened uncertainties.
The APAC region is being affected by COVID management measures taken by the government of China.

growth Factor 2- Connected tv (ctv)

The Trade Desk’s growth was driven by continued momentum across ad formats with CTV leading the way. The Trade Desk is an essential component of the AdTech infrastructure, which includes advertisers, sell side platforms (SSPs), and data providers. The Trade Desk provides advertisers access to premium inventory across CTV, video, mobile, display, and audio. This is critical as advertisers need to realize ROI on advertising spend given the scrutiny many of them are under.

The Trade Desk is designed to deliver ROI based on the platform’s advanced targeting and measurement capabilities. The Trade Desk’s role as “purchasing agent” for advertisers is a clear indicator that the business offers value that advertisers are unable to create for themselves or get from elsewhere. In Q2 22’, The Trade Desk generated revenue growth across formats that was similarly balanced as Q2 21’. The only difference is that mobile and video switched places with video overtaking mobile as the leading ad format.

CTV is the future as the TAM is essentially the same entire linear TV market, which is the largest ad market. The megatrend that is driving spend to CTV is driven by several factors:

Audiences are spending more time consuming streaming content (CTV), which means that advertisers need to “follow the eyes” to reach these consumers.
CTV offers far superior identity and measurement capabilities compared to linear TV, which has highly limited data on the audiences that consume linear content.
CTV has no dominant player like a Google (search) or Meta (social), which means that pricing power is more balanced as well as a much greater degree of transparency (targeting and measurement).

The CTV inventory is massively increasingly, which eases a supply constraint the market has faced since inception. This inventory is coming from content providers that are increasingly introducing more AVOD (ad support platforms) as consumers appear to be feeling “subscription fatigue”. So, the content providers must offer free streaming options to compete for subscribers, which means ads must be introduced as this is the only economic path to running a platform for which the consumer is not paying.

This favors The Trade Desk immensely as the platform offers advertisers the largest CTV inventory of any DSP. The Trade Desk advanced this competitive advantage by striking a deal with Disney that will bring ad supported Disney+ inventory onto the platform. Advertisers that spend with The Trade Desk will be able to leverage the breadth of The Trade Desk’s ad formats to reach consumers across CTV, video, and the open internet (display and audio).

growth Factor 3- platform enhancements

The Trade Desk continued to advance the platform’s value through strategic integrations, which increases the business’ competitiveness. The platform is getting stronger, which advertisers must realize given that they are increasingly signing long-term spend agreements. These are known as Joint Business Plans (JBP’s) and The Trade Desk is securing these agreements with large advertisers across industries.

UID 2.0 continued to act as a strategic tool for the business as it embeds the platform into the AdTech infrastructure. This is central to The Trade Desk’s business model- align with other businesses that literally make up the AdTech infrastructure to embed the platform into the industry. In effect, The Trade Desk wants to make it costly for advertisers and SSP’s to not work with them given that these advertisers and SSP’s would have to go out of their way to not work with The Trade Desk.

Many big names have signed onto UID 2.0 including Amazon, Experian, Disney, and Albertsons. This is strategic for The Trade Desk as these big players are interconnected with other big players in the ecosystem thus embedding The Trade Desk into networks well beyond immediate reach. The Trade Desk has also partnered with massive data providers such as Oracle, Adobe, Salesforce, and Snowflake. This is another amplifier of UID 2.0 as the customers of these data providers will be able to easily use UID 2.0 to identify their audiences.

Lastly, the Wal-Mart DSP is performing very well. This positions The Trade Desk to pursue and/or expand relationships with other retailers interested in building retail media capabilities. These retailers are interested in retail media as they have immensely valuable first party data that can be sold to advertisers who can then measure performance much better given that they will be able to effectively see if the consumer actually bought the product that was advertised.

OPERATIONAL EFFICIENCIES

The Trade Desk maintained strong margins despite 22’ being an investment period for the business, which bodes well for continued operating leverage in 23’ and beyond. The Trade Desk has demonstrated capabilities to generate growth from investments, which provides strong evidence that this time will be no different. The business has a highly controllable cost structure with periodic investment periods to stimulate the next stage of growth. In 22’, The Trade Desk has invested in staffing up to support platform development and sales and marketing initiatives.

INDUSTRY TRENDS

While there have been headwinds in the digital advertising industry, market research firms are still projecting 22’ to be another strong year. This comes as no surprise given the role that digital advertising plays in the business models of countless companies. These firms can’t simply cut advertising spend yet expect to grow their own businesses. They need to spend to stay top of mind or else they risk market share loss to competitors who continued to spend on advertising. As the projections below indicate, digital ad spending is expected to continue growing, especially the segments that The Trade Desk dominates on the sell side (Programmatic, Programmatic Display, Programmatic Video, and Programmatic CTV).

In 22’, market research firm eMarketer is projecting global digital advertising spend to increase 22% on top of the 29% increase in 21’. Going forward, the firm is projecting digital advertising spend to grow at a 5yr CAGR of 12% over the 5yr period ending 26’.
In 22’, eMarketer is projecting U.S. digital advertising spend to increase 18% on top of the 38% increase in 21’. Going forward, the firm is projecting digital advertising spend to grow at a 5yr CAGR of 11% over the 5yr period ending 26’.
In 22’, eMarketer is projecting U.S. programmatic display advertising spend to increase 22% on top of the 41% increase in 21’. The firm is projecting spend to increase an additional 17% in 23’ followed by 14% in 24’.
In 22’, eMarketer is projecting U.S. programmatic video advertising spend to increase 28% on top of the 48% increase in 21’. The firm is projecting spend to increase an additional 21% in 23’ followed by 15% in 24’.
In 22’, eMarketer is projecting U.S. programmatic CTV advertising spend to increase 39% on top of the 79% increase in 21’. The firm is projecting spend to increase an additional 22% in 23’ followed by 19% in 24’.

FORECAST AND VALUATION

The Trade Desk is uniquely positioned to continue capturing share of advertising spend in the US as well as abroad. The business continuously enhances the platform, the core product, which is likely the reason The Trade Desk has a supreme retention rate. The business has a track record of landing clients and expanding wallet share. The platform is becoming increasingly embedded into the infrastructure of the AdTech industry, which increases costs to cut the company out of the supply chain. Those who choose to do business with The Trade Desk are uniquely position to capture significant value given the effectiveness of the platform across advertising campaign goals. While operating efficiency was negative in Q2 22’, this is no cause for concern as it was planned, communicated, and spend came in under budget.

The Trade Desk’s stock has not been spared from the intense negativity controlling the Market in 22’. This is especially true for technology stocks as this sector is being hit the hardest. Importantly, this sector is the most probable to outgrow every other in the real economy. Businesses like The Trade Desk that have strong business models, massive TAM’s, and high operating leverage are rare in the public markets. For these reasons, The Trade Desk’s stock is highly discounted at present valuations, which are not based on The Trade Desk (the company) at all. This is highly likely to reverse as the sentiment gets more constructive, which the last quarter’s results indicated. The Trade Desk’s stock surged over 40% when the company reported the Q2 22’ results. Going forward, The Trade Desk is likely to report similarly strong results for Q3 22’.