Trade Desk Remains A Strong Buy For Long-Term Growth Investors

Now that I’m older and wiser, it’s time to revisit my opinions on my outdated pal, The Commerce Desk (NASDAQ:TTD). The final time I wrote about this digital promoting platform, I really helpful a purchase. My thesis for purchasing on the time was the next:

This inventory has been considered one of my favourite development shares for the previous a number of years as a result of it’s excessive development, worthwhile and has no long-term debt. The Commerce Desk additionally has a enterprise mannequin that produces working leverage, has sturdy moats and the corporate is at the moment on the offensive by innovating across the quite a few world adjustments within the advert trade. This inventory is a purchase for aggressive development traders. Regardless that the inventory sells for a excessive valuation, this firm could be very more likely to develop into its valuation and past over the course of the subsequent 5 years.

Supply: Star Investments

I could not have had worse timing within the brief time period. The worth at publication for that article was $111.64, which coincides with the inventory’s all-time excessive on November 16, 2021. Since then, the inventory is down 35.54% on January 1, 2024, in comparison with the S&P 500’s rise of 1.47%. Nonetheless, my thesis for purchasing The Commerce Desk stays intact, and I like to recommend long-term development traders purchase the inventory in 2024 regardless of the inventory’s continued excessive valuation.

This text will focus on why the inventory dropped after third-quarter earnings on November 9, 2023, the inventory’s valuation, a couple of dangers, a number of the inventory’s development drivers that it added on for the reason that final time I wrote about it, and why traders ought to contemplate shopping for immediately regardless of its underperformance in comparison with the market the final a number of years.

The inventory stays extremely valued

Even after a steep drop from its all-time highs, The Commerce Desk has a excessive valuation relative to lots of its friends. The inventory trades at a price-to-sales (P/S) ratio of 20, among the many most elevated valuations within the cloud house and the digital advert trade amongst publicly traded shares. The corporate is valued within the rarefied air of cloud firms like Snowflake (SNOW) and CrowdStrike (CRWD), as seen within the chart under.

It trades at a price-to-free money movement (P/FCF) foundation of 61, which is excessive contemplating there are some respectable, well-established development shares like Salesforce (CRM), Lam Analysis (LRCX), and Airbnb (ABNB) that you may purchase in a P/FCF vary of 20 to 30.

The corporate’s reverse discounted money movement (“DCF”) evaluation follows.

The Commerce Desk Reverse DCF

Click on to enlarge

Anticipating The Commerce Desk’s FCF to develop at 23% over the subsequent ten years is an aggressive assumption, and a few could even contemplate the inventory priced for perfection.

Why some have been disillusioned within the newest quarter

The market had lofty expectations for The Commerce Desk coming into its third quarter 2023 report, particularly after Meta Platforms (META) confirmed indicators that the digital advert market was turning round in its third quarter report. As well as, its competitor in Related TV promoting, Roku (ROKU), reported an upbeat quarter, beating analysts’ income expectations and together with language in its third quarter shareholder’s letter that administration sees indicators of a rebound in video promoting whereas giving a stable outlook for the fourth quarter of 2023. Roku’s President of Media, Charlie Collier, stated on its third quarter 2023 earnings name, “I totally anticipate the year-on-year development price of video advertisements within the fourth quarter to be just like third.”

Buyers within the digital advert market anticipated The Commerce Desk to verify an ongoing advert restoration. As a substitute, The Commerce Desk was wishy-washy in regards to the advert market recovering within the fourth quarter. In particular, analysts and traders didn’t appear to love this remark from Chief Government Officer (“CEO”) Jeff Inexperienced:

We symbolize the overwhelming majority of the Advert Age prime 200 advertisers, the biggest advertisers on the planet. Beginning within the second week of October, we’ve seen some transitory cautiousness throughout a few of these advertisers. These embrace, for instance, industries which were impacted by latest strikes such because the U.S. auto trade. By way of the primary week of November, we’ve seen spend stabilize and we’re optimistic for the rest of the 12 months and for 2024.

Supply: The Commerce Desk Third Quarter 2023 Earnings Name

I imagine the above remark from the CEO, mixed with steering coming in under analysts’ consensus expectations, prompted traders to unload the inventory by practically 20% when the market opened the day after the corporate launched earnings. That is what occurs when a inventory priced for perfection disappoints.

The Commerce Desk doubtlessly has restricted upside

In keeping with Visible Alpha, as of March 2023, Alphabet’s (GOOGL) (GOOG) Google and Meta Platforms (META) make up 65% of the digital advert market, making it difficult for different gamers outdoors of these two behemoths to achieve vital market share and doubtlessly capping upside. CEO Jeff Inexperienced refers to Alphabet and Meta Platforms closed ecosystem because the “Walled Gardens” and the digital advert market open to competitors because the “Open Web.” The Commerce Desk competes within the Open Web, a fragmented market, with many gamers vying for a smaller share of the pie. The fragmentation of the open web could make it tougher for anybody participant to achieve economies of scale and drive vital development.

The digital advert market is very aggressive. Though The Commerce Desk has carried out effectively since CEO Jeff Inexperienced based the corporate in 2009, the corporate is at fixed threat of being disrupted. The corporate acknowledged this threat in its 2022 10-Okay:

New applied sciences and strategies of shopping for promoting current a dynamic aggressive problem, as market contributors develop and provide new services geared toward capturing promoting spend or disrupting the digital advertising panorama, resembling analytics, automated media shopping for and exchanges. We can also face competitors from new firms coming into the market, together with massive established firms and corporations that we don’t but find out about or don’t but exist. If current or new firms develop, market or resell aggressive high-value services or products that lead to extra competitors for promoting spend or promoting stock or in the event that they purchase considered one of our current opponents or type a strategic alliance with considered one of our opponents, our skill to compete successfully could possibly be considerably compromised and our outcomes of operations could possibly be harmed.

Supply: The Commerce Desk 2022 10-Okay

If you happen to determine to put money into The Commerce Desk, contemplating the chance of different gamers disrupting the corporate is prudent, though the corporate seems to have the higher hand within the open web digital promoting marketplace for now.

It wants the advert trade to undertake UID 2.0

Google’s plan to phase out third-party cookies in 2024 may current a substantial problem for The Commerce Desk, as that might neuter consumer advert focusing on based mostly on third-party information. Additionally, Google may achieve the higher hand with its first-party information and identifier options in a cookie-less world. Due to this fact, The Commerce Desk developed a privateness identifier for the open web named Unified ID 2.0, additionally referred to as UID 2.0 or UID2. Nonetheless, for UID 2.0 to succeed, it requires adoption from publishers, streaming firms, advert companies, and different advertisers.

Nonetheless, The Commerce Desk shouldn’t be the one outfit creating an identifier answer. Along with Google’s efforts to construct an answer in a post-cookie world, LiveRamp (RAMP) is creating an answer named RampID. Since The Commerce Desk has built-in UID 2.0 into its platform, the extra different gamers within the digital advert market undertake its identifier, the higher. Alternatively, the extra different gamers within the advert market undertake different identifiers, the upper the possibilities that the identifier market may turn out to be segmented, leading to The Commerce Desk’s advert platform changing into siloed and shedding its aggressive edge in an already fragmented open web. Due to this fact, in the event you determine to put money into The Commerce Desk, it’s vital to watch the progress of UID 2.0, RampID, and different privateness and identifier initiatives to find out whether or not the corporate can preserve its aggressive benefits.

Why traders ought to stay optimistic

Though the specter of different identifiers competing stays, there’s a cause The Commerce Desk referred to as its identifier Unified ID. In accordance to LiveRamp, “UID and RampID have been interoperable from the start.” So, the 2 identifiers will not be competing. Moreover, The Commerce Desk constructed interoperability into UID 2.0 in order that it operates with different identifier applied sciences, too.

Up to now, UID 2.0 adoption seems to be advancing briskly. The Commerce Desk establishing a partnership with Disney (DIS) in 2022 and its adopting of UID 2.0 has gone a protracted solution to establishing the identifier as an advert trade normal given the ever present nature of Disney’s media empire, lessening the chance of the digital promoting devolving into siloes and strengthening The Commerce Desk’s place within the digital advert market. Disney shouldn’t be the one firm that adopted UID 2.0. CEO Jeff Inexperienced stated on its third quarter 2023 earnings name, “Over the past couple of years, a who’s who of main publishers, advertisers and information companions have introduced their dedication to UID2 and now we’re seeing the optimistic influence of adoption on our platform.” He additionally stated:

They [publishers] perceive that if advertisers solely promote on customers more likely to be serious about their merchandise, then advertisers can pay meaningfully extra for these impressions. With UID2, content material homeowners [publishers] do not should share information. As a substitute, advertisers can use their very own information and to take action, they’re prepared to pay extra. One main streaming platform lately carried out UID2 and the outcomes have been exceptional. Their common every day income from The Commerce Desk has elevated 150%.

Supply: The Commerce Desk Third Quarter 2023 Earnings Name.

One more reason for optimism is its use of Synthetic Intelligence (“AI”) to enhance advertisers’ outcomes. Lengthy earlier than generative AI grew to become well-liked and turned AI right into a buzzword, The Commerce Desk delivered Koa, its first AI-powered product, in 2018. The easy solution to clarify what Koa does is that the corporate designed it to information advertisers in organising advert campaigns and suggests adjustments to the marketing campaign based mostly on Koa’s evaluation of how the advertisements carried out. The AI acts like a trusted advisor however permits advertisers to tweak settings as they see match.

On June 6, 2023, the corporate introduced a brand new AI innovation to its platform referred to as Kokai. Though some characterize Kokai as an improve to Koa, that is not fully true. Koa remains to be a related product, and Kokai would not out of date the older product. The Commerce Desk describes Kokai as constructing upon the muse of Koa’s AI capabilities. Nonetheless, as a substitute of focusing solely on organising and optimizing advert campaigns like Koa, Kokai applies AI algorithms to numerous areas wanted to bid for advert slots on a writer’s content material, the place the AI must make selections in milliseconds. It’s concerned in areas like predictive clearing, which suggests the AI predicts one of the best bid ranges for an advert spot earlier than the public sale. It additionally scores the relevance of every advert impression to the audience and performs many different features outdoors of Koa’s space of focus. On the corporate’s third-quarter earnings name, CEO Jeff Inexperienced stated the next about AI:

We have now been going by way of each a part of our platform and making investments and/or plans to inject AI within the locations the place information units are wealthy, huge and prime quality. Giant language fashions, the idea of ChatGPT, aren’t the very best precedence locations for us to make investments in AI proper now. Deep studying fashions pointed at bidding, pricing, worth and advert relevance are excellent locations for us to pay attention our funding in AI. All 4 classes have non-public betas and a number of the greatest engineers on the world pointed at these alternatives.

Supply: The Commerce Desk Third Quarter 2023 Earnings Name.

One factor to admire about The Commerce Desk for my part is that it invests within the areas that may meaningfully enhance its platform for its promoting and doesn’t put money into the attention sweet of generative AI, making an attempt to create buzz round its inventory. As a substitute of investing in buzzwords, the corporate closely invests in benchmarking measurement instruments, one thing doubtlessly enticing to advertisers. Kokai consists of the next new benchmarks:

Retail Gross sales Index: Measures gross sales information from retailers. The Commerce Desk designed this index to indicate manufacturers how efficient their advertisements are in creating gross sales and exactly the place the sale occurred with collaborating retailers on The Commerce Desk’s platform.

High quality Retail Index: This index measures how related a model’s advertisements are to the those that the advertisements are reaching and whether or not these individuals are within the model’s desired viewers. This index can assist advertisers create more practical advert campaigns to succeed in the suitable viewers.

TV High quality Index: This index measures the worth of several types of video content material. The TV High quality Index could possibly be interpreted as a dig at Google and Fb because it highlights the worth of professionally produced content material over user-generated content material on social media platforms like YouTube and Fb. The index exhibits why allocating extra advert funds to premium TV channels can justify the possibly greater price of promoting on premium TV versus user-generated video. In keeping with The Commerce Desk’s website, “With each 10-point improve in TVQI, we see conversion charges [people taking the desired action after seeing the brand’s ad] improve by a mean of 15 p.c.“

An important facet of The Commerce Desk’s AI initiatives is that the corporate made it straightforward for third events to combine on its platform. Jeff Inexperienced stated on its newest earnings name:

And we’re making it simpler than ever for hundreds of information, stock, measurement and media companions to combine with us. In doing so, I imagine that The Commerce Desk will turn out to be an important innovation hub of the open Web.

Supply: The Commerce Desk Third Quarter 2023 Earnings Name.

The very best half is that the market has but to see the complete influence of Koa and Kokai. Administration believes traders will begin seeing Koa and Kokai produce a gross sales influence in 2024 and 2025. So, take note of what administration says about AI in future quarters.

Its two greatest opponents have issues of their very own

Some analysts imagine that Google’s and Meta’s dominance is already declining. Moreover, an antitrust lawsuit from U.S. regulators threatens Google’s advert enterprise, accusing the corporate of alleged monopolistic practices. A courtroom loss may even additional loosen Google’s grip on the advert market. CEO Jeff Inexperienced stated the next in regards to the lawsuit and the aggressive setting in its fourth-quarter 2022 earnings name:

After all, I’d be remiss to not point out the latest Division of Justice lawsuit in opposition to Google. It is a complete have a look at how Google operates together with lots of the draconian measures they’ve carried out to tilt the market of their favor. The Commerce Desk has not been as impacted as a lot as others within the ecosystem, and I imagine that is as a result of our mission has at all times been to offer an open goal and clear different to the walled gardens. We concentrate on objectively serving the purchase aspect. And with that objectivity, we’ll win it doesn’t matter what. To be clear, this isn’t us versus Google. It is the worth and alternative of the open Web versus the restrictions of walled gardens. We have now been successful for years in an unfair market with some systemic obstructions working in opposition to us. Think about what we are able to do because the market turns into extra honest which we predict it would a method or one other.

Supply: The Commerce Desk Fourth Quarter 2023 Earnings Name.

The Commerce Desk’s different vital walled backyard competitor, Meta Platforms, faces a large threat that advertisers may shift advert budgets from social media platforms like Fb and Instagram to contextual promoting on unbiased publishers’ web sites. The Commerce Desk website defines contextual promoting as a solution to “ship related advertisements by analyzing the content material being consumed as a substitute of the individual consuming it — offering advertisers an alternative choice to cookie-based promoting.​”

The web site CMSWire states the next about contextual promoting:

As companies transfer away from cookies, contextual promoting is changing into one of the vital viable choices for entrepreneurs and advertisers. It presents a privacy-focused strategy to focused promoting and is thought to enhance the relevancy and success of advert campaigns.

Supply: CMSWire

Since The Commerce Desk specializes in contextual promoting, it may achieve a leg up and achieve market share on the expense of social media web sites like Fb.

The corporate has stable fundamentals

Regardless of excessive inflation, rising rates of interest, a downturn within the total financial system, a downturn within the advert trade, and Apple’s privateness initiatives hurting many digital advert gamers, this firm has maintained stable double-digit income development and profitability over the past a number of years whereas even its bigger opponents like Google and Meta suffered. The Commerce Desk has by no means gone under 20% quarterly year-over-year income development over the earlier a number of years, in comparison with Meta, which had income shrink for the first time in its historical past within the second quarter of 2022, and Alphabet, which had total income development close to zero, and YouTube revenue shrinking within the third quarter of 2022.

The Commerce Desk lately reported third-quarter earnings of $493 million, up 25% over the earlier 12 months’s comparable quarter, beating analyst consensus forecasts by $6.02M. On a trailing 12-month (“TTM”) foundation, its income was $1.83 billion in a complete addressable market (“TAM”) that specialists anticipate to succeed in $1 trillion in 2024. So, the corporate has barely penetrated its TAM.

The Chief Monetary Officer Laura Schenkein stated in regards to the quarter:

We proceed to win spend as entrepreneurs more and more focus their funding on platforms that ship worth, significantly in premium video like CTV. This can be a dynamic we have seen many occasions through the years. When the macro setting presents challenges, manufacturers shift to platforms and channels that provide flexibility and measurable outcomes.

Supply: The Commerce Desk Third Quarter 2023 Earnings Name.

The Commerce Desk’s efficiency over the past a number of years is unbelievable because it makes use of a fee-based enterprise mannequin that usually will get paid based mostly on the proportion of media spend. The corporate has endured vital headwinds in advert spending for the reason that finish of 2021. Are you able to think about what this firm can do when the advert market turns and headwinds turn out to be tailwinds? Adweek reported in November 2023 that “In 2024, world advert spend development will flip a nook, rising to eight.2% from a modest 4.4% in 2023.” If that proves true, 2024 has the potential to be a incredible 12 months for The Commerce Desk’s income development.

When The Commerce Desk’s income development outperforms, that outperformance tends to drop all the way down to the underside line, ensuing within the firm producing roughly $200 million in adjusted EBITDA (Earnings Earlier than Curiosity, Taxes, Depreciation, and Amortization), a 40.5% adjusted EBITDA margin within the third quarter. Its non-GAAP (Usually Accepted Accounting Ideas) web earnings was $167 million. Non-GAAP earnings-per-share (“EPS”) was $0.33 beating analysts’ estimates by $0.04.

The corporate was additionally worthwhile on a GAAP foundation. It produced $39 million in web earnings, or an EPS of $0.08.

The above chart exhibits that The Commerce Desk produced optimistic quarterly free money movement (“FCF”) of $184 million within the third quarter and $602 million in TTM FCF. The corporate additionally had $1.52 billion in money and short-term investments in opposition to no long-term debt on the finish of the third quarter 2023. The Commerce Desk’s stable steadiness sheet, profitability, and optimistic FCF put the corporate in a powerful place to proceed investing in very important enterprise areas, like AI, to drive future income development.

Do you have to purchase, promote, or maintain?

If you happen to’re an investor with a 12 months or much less time horizon on the lookout for a catalyst to put money into The Commerce Desk within the close to time period, keep away from investing within the inventory. The financial system and the advert market will not be completely out of the woods but, and since this firm will get paid based mostly on how a lot media spend happens, if the advert market retreats from right here, the corporate’s fundamentals may deteriorate. With the inventory priced for perfection, traders may exit the inventory stage left.

The story is totally different in case you are a longer-term investor with a time horizon exceeding three years and imagine in CEO Jeff Inexperienced’s imaginative and prescient for digital advert expertise. Suppose the advert market rebounds over the subsequent a number of years, coinciding with the corporate’s identification and AI initiatives beginning to repay in a re-acceleration in income. In that case, the inventory worth has appreciable potential to beat the market regardless of issues about overvaluation. A number of weeks earlier than The Commerce Desk reported third quarter 2023 earnings, Looking for Alpha wrote that Loop Capital gave the inventory a purchase score. The article acknowledged the next:

Loop Capital initiated protection of the inventory at Purchase, calling it “top-of-the-line long-term development alternatives accessible to expertise and media traders immediately.” The advert trade is heading right into a “holy grail” second pushed by information and expertise, analyst Rob Sanderson stated, with superior focusing on, measurability, transparency, and “in the end efficacy of funds deployment for entrepreneurs.” And The Commerce Desk is enabling a lot of the change on the open web, he stated.

Supply: Looking for Alpha.

Not a lot has modified between the time that Looking for Alpha printed that article on October 24, 2023, and immediately, besides some traders are apprehensive in regards to the short-term way forward for the enterprise. Nonetheless, the long-term thesis stays intact. I like to recommend the inventory as a powerful purchase for long-term development traders.