The Trade Desk Is Flying High. Can It Last?

When The Trade Desk IPO’d in September 2016, it nearly doubled its own value projection and quickly became a $1 billion company.

Fast-forward two years and the company’s market cap sits at around $6 billion. The question for many analysts and ad tech observers is: How long can this ride last?

Investors have pumped a lot of cash into the company, but The Trade Desk has grown responsibly, with spending in line with revenue and without sacrificing profitability, said Elgin Thompson, managing director of the media and tech investment firm Digital Capital Advisors.

“That tells you right there that they’re humming along operationally really well,” he said.

But the markets giveth, and the markets taketh away.

Investors will be looking closely at whether The Trade Desk can maintain its growth and profitability. Doing so will require resisting the margin compression that has visited so many ad tech platforms, capturing TV advertising budgets and fending off big platform DSPs operated by Google and Amazon.

The Trade Desk did not respond to requests for comment.

Take rates:

“We’ve told the street and shareholders that our margins will be between 15% and 20%,” CEO Jeff Green told AdExchanger last year. “We don’t expect that to change for as far as we can see into the future.”

But seeing into the future is a tricky business. And since the beginning of 2018, margins have dropped painfully for other major ad tech exchange players like AppNexus and Rubicon Project.

If The Trade Desk can continue to grow and win business then its take rate isn’t unreasonable, said Pivotal Research senior analyst Brian Wieser. “The problem is that the growth required to support the valuation they have now is implausible.”

When The Trade Desk beat its own revenue guidance by $8 million for its Q2 earnings report this year, its market cap jumped by $1 billion.

“It’s momentum trading, and I don’t think investors on the street quite appreciate that,” Wieser said.

The TV prize:

Connected TV (CTV) is fueling optimism for The Trade Desk, but it’s fraught with risks as well.

Green has repeatedly told investors that CTV inventory and revenue growth is the most exciting category and growth opportunity for the company.

But in TV advertising, the buying and planning software typically accounts for one percent or less of total campaign spend, Wieser said.

As TV advertising becomes more data-driven, it will resemble a hybrid of traditional buys and programmatic auctions where vendors take a meaningful chunk of spend, as can be seen with platforms like Roku and Hulu. Still, as CTV turns into a revenue pillar for The Trade Desk as opposed to a high-growth new channel, the company will have to make a strong case to justify its take rate with advertisers accustomed to allocating less to software vendors.

DSP growth opportunities:

The Trade Desk hoovered up market share in the crowded DSP space primarily by winning business from early programmatic companies like Turn, Tremor and AppNexus. Even as a public company with rocketing growth, The Trade Desk has succeeded by consolidating the independent programmatic market rather than from major platforms like Google and Amazon.

At some point, the low-hanging programmatic fruit will be gone, and market consolidation, like AppNexus’ acquisition by AT&T, will pit The Trade Desk squarely against companies with market caps in the hundreds of billions, like Amazon, Google, AT&T and Comcast, that have major advantages (i.e. prized media) when it comes to winning video ad budgets.

The Trade Desk has some clear advantages in this scenario. Insignificant losses for Google can fuel strong growth for a mere multi-billion dollar business like The Trade Desk.

“My sense is The Trade Desk has stepped into the opportunity to be the big alternative to walled garden platforms and done well,” Thompson said.

Thompson said the Trade Desk has won business from Google after the ad industry leader changed its ad server ID policy to restrict data and measurability to its own Ads Data Hub cloud product.

The challenge, according to Wieser, is that The Trade Desk’s market valuation has already priced in expectations that it will win share from walled gardens.

“Unless you believe Google or Amazon are going to be crushed by them on some front, it seems unlikely to support the numbers they’re trading at,” he said.

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