This Company Wants to DESTROY Google
Table of contents
The Trade Desk stock has been gaining popularity today after its 50% haircut. The company missed revenue estimates for the first time ever, causing a massive selloff. The added fears surrounding weakening consumers and uncertain tariff impacts haven’t helped, either. Still, The Trade Desk has managed a long track record of strong, consistent growth in a competitive industry. Is TTD stock a buy now? Let’s find out.
Disruptive growth is what underpins some of the world’s greatest success stories. And the biggest growth stories all have one thing in common – strong persistent growth and the potential for future profitability. Today’s stock has growth in spades and one of the world’s biggest success stories firmly in their sights – Google’s ad business. To understand what today’s company does, I’ll use an example from our own business. And for those of you with 7-second attention spans, the company we’re going to discuss today is Trade Desk.
Now you can go back to surfing pron.
Our Experience with Ads
So our YouTube channel is actually a very small part of what we do here. We’ve written over 2,400 research pieces and these can be found on our website and they’ll attract traffic typically from Google search or more recently from LLMs. Now when people read our content, they show interest in a very particular thing. So, for example, they may be researching investing in graphene and they come across our article on graphene stocks. So then small graphene producers who want to attract investors would run ads on our site.
And that’s precisely why we stopped running ads. Why is it that the people with the worst investment opportunities always have the most money to spend on investor relations? You have to ask why that is. So how do those graphene producers find us to run ads? Well, we simply enabled Google ad slots on our site and Google did the rest.
It did the connection between those people running to run those very specific ads with the people that had the content for that very specific topic. And, of course, we were always approached by companies that wanted to displace Google so they would tell us, “Yeah, we can generate more revenue than Google does for you.” So let me tell you the other side of that coin. We sell a subscription product for retail investors.
So to attract new subscribers, we have, in the past, ran ads. Now that doesn’t work very well because we’re a trust-based business and that’s why many of the people signing up to our offering today have been watching our channel for years. So, of course, you can see where we eventually ended up. Instead of paying Google to run ads, we just run the ads ourselves on our own site and it costs us nothing. Advertising, of course, our own products.
Google, the AdTech Giant
So as you can see, Google controls that entire vertical stack – from the people that want to buy ads, to the people that are running ads. And since they control 95% of searches, it’s said to be somewhat of a monopoly.
The Federal ruling that found Google illegally holds monopolies in publisher ad servers and ad exchanges. So Google forces publishers to use its ecosystem limiting interoperability with competitors. So this control lets Google charge higher fees and take larger cuts. So when we look at how Google makes money from their ad network, that’s listed in their financials as Google Network. You can see here the red arrow pointing to that and that includes revenues generated on their property such as AdMob AdSense and Google Ad Manager.
Now this is where things become very complicated in the context of Trade Desk and the reason we’ve been talking about this is twofold. One, so that you better understand the Trade Desk business model and two so we better understand how Trade Desk interacts with Google.
The Trade Desk, the Google killer?
So Google controls roughly 90% of global web searches, as I said. If you want to invest in digital ads, invest in Google which is a leader. And we’ve always believed that to be true, so we sort of shut out Trade Desk in the past as something we didn’t want to look at and our premium subscribers all voted on our discord server that they’d like it covered. So here we are. The truth is, it’s far more nuanced than that. And then digging in, we discovered that.
So Google may be forced to divest their business because of the fact that they were found to be a monopoly. That could be a double-edged sword, some say, but we’re largely going to avoid speculating on this potential outcome. Turns out the opportunity for Trade Desk is much more broad than just search engines. So, for example, digital advertising is now expanding into connected television. So one company, just one, that’s targeting Google’s network revenues or all those revenues would be Trade Desk. And this slide is from their investor deck.
It shows what they talk about as the open internet and we’re going to contrast that with what they call Walled Gardens. Now Trade Desk says there’s somewhere around a trillion dollar opportunity in global ad spend so their TAM is quite large. Nice, strong double-digit revenue growth consistently over time. And they also show here gross spend.
So the amount of money going through their platform and if you divide revenues by gross spend you get the percentage of take – what they refer to in the industry as a take rate. So all the money going through their platform, they take about 20% of that which is fairly high. Google’s take rate for their similar offering is said to be around 15%. When we look at their revenues over time in a quarterly basis, we see some seasonality.
So you want to pay attention to that. This sort of makes sense if spending on their platform goes up in Q4, that’s usually associated with the holidays. And when we look at customer concentration risk, we don’t see any problems. So you had one customer accounting for 14% of gross billings but not greater than 10% of revenues. That’s rather interesting, right? So the largest customer is probably getting a deal on their spend. So I like how this diagram shows where Trade Desk sits.
They’re often referred to as a DSP or Demand Side Platform. So we would have been on the demand side when we were purchasing ads.
Considerations for TTD Stock Investors
So some things to consider. The bold thesis for Trade Desk is not that intuitive. We need to try to better understand that. Revenue growth is really ground truth that there’s some there-there. So we’d like to understand that. So if growth starts stalling, we can perhaps understand why. And it’s not even overly obvious or intuitive as to what they do if we go deeper than that diagram that I just showed you.
Yeah, yeah, they sell ads but we need more than that. Now a lot of their communication focuses around Google and this open internet concept. Now they believe Google’s going to divest their Google network activities that would, they believe, weaken one of their key competitors. We’re going to leave that off the table. And let me explain why.
So when you look at this slide from Trade Desk, it shows, of course, their large TAM heading towards a trillion dollars.
But this interesting factoid, they say, CTV is our largest and fastest growing channel and will be for the foreseeable future. That’s probably one of the best hints they give you in their investor deck as to what they actually do. That stands for Connected Television. They also talk about this significant opportunity for international growth. That’s really easy to understand. You can look at this slide here and see that 88% of their revenues come from 40% of the ad dollars.
So there’s a huge opportunity for them to expand internationally.
The Connected TV Thesis
So let’s better understand Connected TV because they told us that’s their fastest growing segment. They don’t see that changing and it’s predominantly where they operate. And Connected TV refers to televisions that are connected to the internet.
So this allows users to stream video content from various sources. So this is the only channel out there where you have 100% of your traffic logged in. That means there’s no cookie problems.
You know who your customers are, your potential customers, people you’re trying to sell things to. So they say this is the kingpin of the open internet. It’s a more effective and efficient place to advertise and they say it should be the first place all advertisers spend. Not walled gardens. Let’s talk about walled gardens.
So these are where advertising activities are primarily managed within the platform’s own infrastructure. So prime examples would be Facebook, Google, and Amazon. Trade Desk thinks these places are not optimal to be advertising. That tells us something about their business strategy or direction. So the growth potential is huge for Connected TV. Ad spend is going to hit $23 billion by the end of 2024, becoming 35% larger than online video.
Top connected TV platforms include Hulu, YouTube, Amazon, Roku, and Peacock. I guess this thesis probably isn’t very intuitive for me, I don’t watch a lot of television. For those that do, these CTV ads have been seen to have a 98% completion rate and 51.5% attention rates on average. 87% of brands say CTV advertising is effective or superior to traditional TV ads. And when you look at, for example, the ecosystem in the UK, you see it’s a rather complicated space.
There are lots of moving parts. So the takeaways here. Trade Desk describes this nebulous $1 trillion ad opportunity but they’re largely focused on connected television. And this is an emerging opportunity with loads of potential especially internationally. Now the extent to which Google and Trade Desk compete is largely based on CTV. That’s what we’re interested in, right?
So for Google, this is an offering called DV 360. The only data we have about this is from 2020 and it’s in that court case that Google had where they put up this competitive overview. It’s interesting. It shows the amount of revenues that DV360 booked in 2020 against the amount of revenues that Trade Desk has and you can look this document up yourself.
It’s very good and if you want to understand the dynamics between Trade Desk and Google. So investors ought to give that a peek. But Trade Desk’s heavy focus on talking about Google means they see that company is a threat and as an opportunity. And there’s a lot of money to be made in this lucrative market.
The Trade Desk Profitability Metrics
So if you look at these profitability metrics for Trade Desk, we really like this operating margin here, the consistency and upwards trend and then when it comes to gross margin, that’s the potential for profitability, it really trades in a tight range between 74% to 82% gross margin. Some recent consistency, that’s great to see. Now profits are an opinion, cash is a fact.
You see the cash flows along the bottom there for the past four years. This is a healthy business. They’re not going to have to raise cash. Now the other appealing thing that people might note is that Trade Desk is somewhat of an AI stock in that they’ve been doing artificial intelligence for quite a while since 2018 when they debuted this AI for advertisers offering.
And, of course, now everybody’s doing AI, everybody’s trying to be an AI stock. But more recently, Trade Desk debuted this Kokai digital marketing platform.
They’re going to use all that big data they have and artificial intelligence to better serve their customers. And when they throw out metrics like this, it’s really impressive. So proof is always in the pudding.
They show lower cost per unique reach of 42%. They’re simply comparing the customer experience prior to deploying this platform for existing customers, 24% lower cost per click, 27% lower cost per acquisition. So if you understand how advertising works, these are very, very appealing metrics. Now those looking at Trade Desk stock may be tempted to think there’s a half-off bargain here.
It’s down 54% year-to-date. But it’s very important that you always look at valuation when you consider whether or not a stock is a bargain.
TTD Stock Valuation After 50% Drop
So when we look at valuation, we see our simple valuation ratio – market cap divided by annualized revenues – coming in at 9. So that’s above our catalog average of six but for the sort of growth on offer, that’s not bad at all.
But when you look at price-to-earnings ratio, since this company is moving to become more profitable over time, you see that’s rather high – a current P/E ratio of 68, Forward P/E ratio of 32. I think that contrasts to NASDAQ at around 22. So you could argue, based on those metrics, that it’s still valued fairly richly but you can see this acceleration in earnings per share. So overall, since we would still use simple valuation ratio, it doesn’t appear to be overvalued.
Do We “Like” TTD Stock
Now one other interesting thing that we noted here is the connected TV device market share in North America. So you see Roku leading that. This points to ARK’s thesis on Roku and I never really understood why they were so bullish about that firm.
But now we’re starting to see why and they describe that as being a- over $150 billion global opportunity for Roku. They’re the leading streaming platform you see, by a mile, in the US, Canada, Mexico, at least, according to this metric in 2024. So that’s probably a different conversation. But whether or not we like this firm or we would avoid it, we’ve historically avoided ad businesses because of the Google-takes-all perception but that’s a bit of domestic bias, to be honest, cuz now we better understand the picture, if you will, the connected TV picture.
Really like the profitability on offer here, the consistent revenue growth, their focus on AI and big data. There’s lots of room to run. So they have $3 billion in annualized revenues versus $30 billion opportunity, which is growing. You see here, chart on the right, showing total ad spend for television and connected TV. So connected TV growing over time.
Certainly don’t like their opaque business model, possible regulatory risks inherent to the advertising industry, and we don’t know market share numbers for connected TV. It’s, again, rather opaque. So the growth thesis has already been proven. Let’s assume it continues. Now it becomes all about focusing on red flags. So please give us your reasons why you wouldn’t invest in Trade Desk.
So I’m going to go ahead and leave you with this piece here we did on Google. It’s sort of related. How Google might be affected, their search business might be affected by LLMs. Give that a watch next. Thanks so much for taking the time to watch this today.
Share
