The Trade Desk

Q3 22’ SUMMARY

The Trade Desk delivered another quarter of revenue and earnings growth that outperformed management’s guidance and consensus estimates. The business generated strong growth from continued adoption of the platform by way of spending increases driven by strong demand for CTV inventory. The business’ positive earnings surprise was driven by management’s focus on expense management as the company scales.

The Trade Desk’s performance in Q3 was in stark contrast to other advertising companies due to spending moderation as a way to manage macro fears. In Q3, many public companies painted a rather weak picture of the industry with some players delivering zero or negative growth. The Trade Desk successfully gained market share in the quarter due to the compelling ROI the platform offers advertisers.

The business model demonstrated that The Trade Desk is in tune with key players in the industry, which are advertisers, publishers, and consumers. The platform’s technology was designed to add value to such a large degree that the business would be firmly positioned in the infrastructure of the digital advertising industry. The platform’s advanced decisioning technology delivers higher ROI to advertisers, higher CPM’s to publishers, and greater relevancy to consumers.

While the current climate has many cross currents, the industry is supported by megatrends that are here to stay. Digital advertising is driven by consumers spending more time online than the physical world thus driving programmatic advertising which is designed for the digital environment. Lastly, the streaming megatrend creates a massive tailwind for CTV advertising in 23’ and beyond.

Key Takeaways from Q3 22’

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

• CTV drove significant share gains for The Trade Desk.

• 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.

• Shopper marketing spend continued to massively grow driven by key partnerships.

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 delivered strong results in the domestic and international lines of business. Similar to previous quarters, the domestic business materially outperformed the international business in Q3 22’. The outperformance was 20ppts in Q3 22’, which is a positive development from a balanced growth perspective as the growth spread was ~30ppts in Q2 22’. Similar to prior periods, the international line of business experienced cross currents from macro uncertainties in Europe and COVID lockdowns in China.

The strong performance in both markets was driven by continued momentum in the CTV segment of the industry. Even though the international business underperformed the domestic business, CTV growth was actually much stronger in the international business than CTV growth in the domestic business. This was driven by further development of the CTV advertising market, which materially lags the scale of the domestic CTV advertising market. Overall, The Trade Desk remains well positioned to bring international sales as a percentage of total closer to the advertising industries global mix. The key driver of this parity is adoption of programmatic advertising abroad, which materially lags the penetration of programmatic advertising in the US.

growth Factor 2- Connected tv (ctv)

CTV remains a key growth driver for The Trade Desk in 22’ and beyond. The CTV pie is only growing as streaming continues to displace linear TV with “cord cutting” presenting a real threat to legacy TV platforms. This disruption is extremely positive for The Trade Desk because the reallocation of ad spend is not cannibalistic for the business so it represents massive incremental revenues. This dynamic is due to the advertising structure of linear TV, which is based on manual buying/selling rather than programmatically (automation).

The megatrend driving the migration of consumers from linear TV to CTV is the massive increasing in high-demand streaming content. Consumers continue to demonstrate their desire for the choice (on-demand viewing) and entertainment offered by streaming providers such as Netflix, Hulu, Disney, Apple, and dozens of other providers. This migration compels advertisers to reallocate budget to streaming given the need to stay top of mind. Advertisers really have no choice- CTV advertising is a must. This spending increase has incentivized content providers to offer more streaming options, especially ad-supported as consumers are starting to demonstrate “subscription fatigue” due to having many paid subscriptions. These dynamics are driving greater levels of ad-supported CTV inventory as well as greater levels of budget allocation.

This market dynamics are wonderful for The Trade Desk as the business is well-positioned to create value for all stakeholders. The business is able to leverage the high demand for ad-supported CTV to attract content publishers by offering higher CPM’s than linear TV. The growing inventory positions the business to leverage the high ROI of CTV inventory to attract advertisers to the platform. As a result, The Trade Desk has been largely insulated from the headwinds in the legacy advertising segments as the CTV market still has massive linear TV share to take. In fact, CTV advertising provides much greater ROI than linear TV which supports even greater budget shift given the market conditions.

• NBC’s Peacock platform has transitioned to biddable inventory after initially launching with fixed price inventory, which is leading to much higher CPM’s (and spend for The Trade Desk).

• Disney is expected to increase ad load and UID usage, which will significantly increase spend given Disney’s scale in the CTV market.

• CTV inventory on The Trade Desk’s platform continues to scale.

• The Trade Desk’s omni-channel platform makes CTV spending more valuable as advertisers realize higher overall ROI through reaching consumers across channels.

growth Factor 3- platform enhancements

The Trade Desk continued to execute on strategic initiatives designed to increase the power of the platform. These activities were supported by additional expense allocation to support tech and data access. This is fundamental to The Trade Desk’s business model of delivering high ROI for advertising using the proprietary targeting and measurement technologies. The company continued to gain adoption of UID 2.0, which gave management confidence to project that UID tagging will be on the majority of data flowing through the platform on the advertiser, publisher, and data provider sides of the supply chain. This is a major advancement as it will make the platform considerably more powerful from a targeting and measurement perspective. As a result, The Trade Desk will be positioned to drive greater spend through new customer acquisitions and wallet share gains. Lastly, the business continued to address the shopper marketing opportunity in the form of spend and strategic partnerships.

• Strong JBP (joint business plan) growth with some advertisers committing to spending $1bln over time.

• Partnerships with over 80% of the largest retailers to address massive shopper marketing opportunity.

• Widespread UID adoption is expected to increase the value of advertiser’s first party data by 10x driven by “closing the loop” between advertisement and conversion tracking.

OPERATIONAL EFFICIENCIES

The Trade Desk delivered strong operating efficiency in Q3 22’ after experiencing margin compression in Q2 22’ due to investments in future growth. The business is demonstrating a level of efficiency that is highly rare of public companies, especially those in the tech sector. This efficient cost structure is a clear demonstration of management’s prioritization of expense efficiency as well as topline growth. While the company still has initiatives that require upfront investments, such as international expansion and platform upgrades, the business model incorporates a lean cost structure that ensures profitability.

INDUSTRY TRENDS

While the digital advertising industry has been receiving significant negative press in recent times, the underlying market remains intact. This is largely driven by megatrends that transcend negative sentiment and uncertainty. The fact is that business have integrated advertising into their business models, which means that they need to continue advertising in order to drive traffic and sales. If businesses could simply grow without advertising then they would have done so many years ago. Interestingly, competition for consumer’s dollar incentivizes businesses to continue advertising to attain mindshare above the competition.

Advertisers are certainly becoming more selective with their spending as they are focused on identifying advertising with a measurable ROI. This means that some players will win share at the expense of others that lack demonstrable ROI advantages. Companies are continuing their hiring, consumers are continue their spending, and digital activity continues compounding. Additionally, spend on CTV is expected to materially outpace the other segments of the advertising industry. These are likely to drivers behind market research firm, eMarketer’s forecast for continued strong growth over the next several years on a domestic and global basis.

FORECAST AND VALUATION

The Trade Desk is positioned to continue delivering durable growth and efficiency in Q4 22’ and beyond. This translates to addition share gains as advertisers continue migrating budget to segments of the market that The Trade Desk dominates, which are the programmatic and CTV market segments. While there have been headwinds in the digital advertising industry, advertisers still need to market to consumers. Many advertisers are balancing the desire for expense management and the need to advertise by allocating budget towards inventory with clear ROI advantages. This positions The Trade Desk very well as the business’ core advantage is its proprietary technology that delivers ROI much higher than competitors and in-house solutions.

The Trade Desk is also positioned to grow thru the industry cross currents due to the key role that CTV plays for the business. This is highly relevant as CTV spend is growing at a much higher rate than the rest of the advertising industry. Additionally, The Trade Desk’s broad industry diversification creates insulation from headwinds affecting specific industries, such as crypto advertising. The business is likely to drive considerable spend growth from the political advertising that occurred in the first half of Q4 22’. The business is positioned to deliver efficiency gains in Q4 22’ as many of the investments have taken place already. This positions that company for strong revenues as well as earnings.

The Trade Desk’s stock has continued to be affected by the sharp negative sentiment in the market that has disproportionately affected technology stocks. The Trade Desk’s stock has also been negatively affected by peer advertising businesses that have not fared well this year despite The Trade Desk demonstrating that the business is fundamentally superior to these underperforming peers. The stock is poised to materially surge as sentiment turns positive, which is clearly driven by CPI and Fed interest rate policy in response to CPI. As CPI growth continues to slow and turn negative, sentiment is very likely to drive multiple expansion back towards normalized levels. This multiple expansion combined with The Trade Desk’s strong profitability is very likely to drive stock price appreciation in 23’.