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The secret of how ads find you makes a great stock story
One of the hottest tech stocks in the US market at present – which is really saying something – is advertising technology company The Trade Desk.
Quoted on Nasdaq under the ticker TTD, The Trade Desk went public in September 2016, priced at US$18 a share, and the stock has never looked back. TTD closed its first day of trading at $30.10 a share, and has never been lower than $23.87. The Trade Desk started 2020 at $232.75; it was trading at $305.30 when the COVID Crash hit; the stock slumped to $160.39 by early April, but has taken off like a rocket, and is now changing hands at $481.11.
The Trade Desk specialises in programmatic advertising, which is the fully automated process of buying and selling digital advertising. Programmatic advertising is delivered to specific people rather than to specific media: if you’ve ever wondered why, just after you visited a website of a company selling running shoes, you’re now bombarded with ads for that company’s running shoes wherever you go digitally, that’s programmatic advertising.
Because you’ve connected with that brand of running shoes, the AI-powered algorithm knows that, and puts into action a plan to enable that running shoe company to sell to you. The algorithm knows your demographic and consuming behaviour, and where you like to go on the Internet, social media, smartphone and “connected TV” – think Netflix.
This data connects audiences with advertisers – the advertisers, like the running shoe company, then pay to put their ads (through their ad agencies) in places where you are likely to see them. These ads are “programmatic ads,” and the buying and selling of these ads happen in real-time, in milliseconds, through demand-side platforms (DSPs) that are auctioning billions of ads a day, in real-time bidding, or RTB. The Trade Desk is a DSP – think of it as an ad exchange, like a stock exchange.
But the true beauty of this system is that the platform is also analysing the ads’ impact, and that affects the pricing. The data being collected in real-time analyses click-throughs, lead conversion rates, and sales. Because of the extremely targeted nature of automated ads, buyers are able to better measure the efficiency of their advertising campaigns. (Programmatic advertising does not include “paid search” ads sold by Google Ads and YouTube, which combined are the largest online ad seller.) In fact, The Trade Desk is taking market share off both Google and Facebook.
The Trade Desk founder and CEO, Jeff Green, says programmatic advertising is quite simply the most effective advertising method in history. In the past, says Green, the only truly measurable advertising method was door-to-door sales, where the salesperson could customise the message individually, and be super-effective. But that could not be done on a large scale – until digital programmatic advertising came along.
“For the first time in the history of advertising, not only can (advertising) be customised, and not only can it be data-driven in terms of the choices we make and what we buy, but we can also follow it from the ad delivery, who saw it, who bought it, all the way to the end of the funnel, and then repeat the cycle,” says Green.
It’s data-driven digital advertising, which allows advertisers and marketers to target and also measure ads like never before. Whether we know it or not, we’ve all seen plenty of programmatic advertising. It could be static display ads, on websites; video ads; social ads, which appear on our social media sites because they’ve collected the data needed to create experiences targeted to us; or native ads, which can appear anywhere we’re browsing.
Green says ad campaigns can now be so specific, they can take a very small budget for a niche product and get it in front of the people who should see it, and become successful quickly. Companies and brands can be more insightful and relevant to consumers, because they only spend their ad dollars where their data leads them – and at all times, they know exactly how their campaigns are performing.
He says the big problem that advertising has always had is that there has been no price discovery – that economic concept of knowing what you’re buying and selling. The price transparency of being able to measure an ad’s effect changes this – an ad that is never seen, or does not work, quickly becomes priced at zero.
By giving advertisers power, visibility, transparency and control, he says, you have the “future of advertising” – in which, “there will be fewer ads; they will be more relevant; they will cost more; and they will be worth it.”
Programmatic advertising has grown from a US$17 billion market to an estimated US$45.7 billion market in 2019, but as Green points out, that is still a drop in the ocean in the global advertising market, estimated at about $US650 billion. Eventually, he says, this will “all be programmatic.”
The Trade Desk’s current partner base includes names such as Amazon, Disney, Spotify, Channel 4 (in England), ProSieben (in Germany), TF1 (in France), Baidu, Alibaba, Tencent (in China), TikTok and Samba TV (Australia). The company’s customer-retention rate has run at more than 95% for the past five years.
Doubling in 2020, and becoming a 26-bagger since IPO four years ago, attests to how much the ad market – and stock market – love TTD. The company is profitable: it reports second-quarter results tonight US time (August 6). On the revenue side, ad spending in its markets is expected to have surged because of lockdowns – particularly in Connected TV. A strong record of cost-control has analysts expecting TTD to “beat the Street,” and bring in better-than-expected earnings.
Unfortunately, the stock has just run too strongly in 2020, and has outstripped value. According to MarketScreener, its sample of 16 analysts has a consensus rating of “outperform” – with six “buys” and one “outperform,” against eight “holds” and one “sell” – but a consensus target price for TTD well south of the current share price, at $354.47.
The Trade Desk is a great story, going forward – but a fully-priced one, for now.
