The Commerce Desk: A Lengthy-Time period Winner Vs. Google However Presently Overpriced (NASDAQ:TTD)

Funding Thesis

The Commerce Desk (NASDAQ:TTD) has outpaced the digital promoting trade as a complete because of its improvements in programmatic promoting and market positioning as an solely demand facet platform (‘DSP’). The corporate’s tailwinds stay plentiful inside the Related-TV (‘CTV’) and Retail Media verticals. Moreover, a shifting identification panorama as Google’s ‘Cookies’ are phased out presents a possibility for the corporate’s identification resolution, UID2, to take main share. Regardless of its outperformance and aggressive sturdiness, TTD trades at 40x EV/EBITDA vs a peer common of about 10x. Cooling progress and general aggressive uncertainty are further headwinds. TTD shares look unattractive at present ranges, with my truthful worth estimate within the mid-$30’s.

The Shifting Digital Promoting Panorama

Digital promoting has been one of many quickest rising markets the previous decade, climbing at an annual fee close to 20% between 2011 and 2021 and overtaking conventional promoting. Regardless of normalizing progress post-pandemic, world digital promoting spend crossed $600 billion in 2023 and is predicted to shut in on $1 trillion by the 2030.

Improvements within the mid-2000’s led to the arrival of programmatic promoting. Programmatic leverages client knowledge and machine studying to assist advertisers find and buy optimum media spots with the purpose of enhancing return-on-ad-spend (‘ROAS’) and enhancing marketing campaign effectiveness. Programmatic promoting exploded onto the scene because the variety of web customers grew and digital media consumption skyrocketed. This led to 80% of ad-dollars going to programmatic, almost certainly for good.

As adoption of the know-how expanded, so has the variety of opponents offering it. But, giant companies like Google (GOOGL), Fb (META), and Amazon (AMZN) management a lot of the market. Google has locked down the general promoting trade for many years given its tight grip on video and search advertisements. Google’s legacy web identification resolution, Cookies, has lengthy been the gold-standard for advertisers in search of focused advertisements however its depreciation was introduced in 2020. After just a few years of delays, Google seems to be able to make huge progress on its Cookies phase-out in 2024. Even with just a few years to regulate, this can create an enormous upheaval in digital promoting as 75% of entrepreneurs are nonetheless reliant on the know-how – but it surely additionally presents a possibility for alternate options to take its place.

Although the digital promoting trade is maturing, loads of demand stays for the taking – and The Commerce Desk seems to be well-positioned to do exactly that.

The Commerce Desk Technique & Outlook

Let’s choose again up with identification. The Commerce Desk was one of many first firms to start creating an alternate identification resolution to Cookies, far earlier than its depreciation was introduced. The corporate launched Unified ID (‘UID’) in 2018 and upgraded to UID 2.0 not lengthy after. UID2 permits customers to opt-in for knowledge sharing and makes use of fundamental information akin to emails and cellphone numbers as identifiers. Customers opting in eliminates undesirable knowledge sharing and creates a extra sturdy audience for advertisers. The know-how is interoperable, that means it captures these identifiers wherever customers login throughout the open web, and every shoppers knowledge is encrypted for cover. This omnichannel nature of UID2 permits entrepreneurs to focus on customers with larger precision throughout nearly all mediums, not simply search. With the part out of Cookies within the foreground, UID2 has potential to take a large chunk of the market along with what it already has.

UID2 has seen widespread adoption from publishers to platforms; NBC, Warner Bros., The Washington Publish, and Snowflake are only a few. The Commerce Desk additionally partnered with one other pioneer of different identification options, LiveRamp (RampID), to assist seize extra share of the market. UID2 already has a powerful foothold on the way forward for identification, particularly amongst publishers:

Although UID2 just isn’t presently monetized by The Commerce Desk, changing into the popular identification resolution would drive extra advertisers and publishers to its platform and streamline knowledge aggregation.

Related-TV (‘CTV’) and Retail Media proceed to be further progress alternatives for The Commerce Desk. Conventional TV (Cable and Broadcast) has fell beneath 50% of complete TV viewership in 2023 with streaming climbing to just about 40% of complete viewership, most of which is thru CTV. As extra views flock to CTV, so do advertisers with CTV taking a rising portion of TV and general digital advert {dollars}.

A driver of this development is the more and more widespread ad-supported tier of main streaming providers. As these streaming platforms attain the next stage of saturation, an ad-tier is required to additional drive monetization. The Commerce Desk was a first-mover on this rising vertical as the corporate was fast to parlay its programmatic capabilities into the area. It has paid off with almost 40% of its revenues now coming from Video (principally made up of CTV) along with Video being the corporate’s quickest rising income class in keeping with administration.

Retail Media networks, which permit entrepreneurs to promote in partnership with retailers, have grown quickly alongside the e-commerce trade. These networks allow advertisers to faucet into retailers’ first-party knowledge for more practical advert concentrating on whereas retailers generate income promoting ad-inventory. Retail media has been a key avenue for The Commerce Desk’s topline progress and will probably be an space of focus going ahead as indicated by administration in Q3. The corporate already has a large footprint because of partnerships with retailers like Walmart, Goal, and a handful of enormous worldwide retailers.

The Commerce Desk has a number of alternatives in its evolving market and appears poised to be a long-term winner. However can the agency proceed to take floor towards aggressive stalwarts like Google, Adobe, and Amazon?

Financial Moat

It’s onerous to disregard TTD’s outperformance with revenues rising at an annual clip of 36% the previous 5 years, vastly outpacing the trade, and the top off 390%. Each knowledge factors are inclined to allude to some form of present (or potential) aggressive benefits.

Programmatic Promoting First-mover & Information Benefits

Just a few early public adopters of programmatic promoting strategies have been Google in 2013 (Google AdSense) and Fb across the identical time. However The Commerce Desk was even earlier to the market, based in 2009 by David Pickles and Jeff Inexperienced who remains to be CEO. They based the corporate a pair years after Inexperienced’s first promoting firm AdCEN was acquired by Microsoft (MSFT). The Commerce Desk’s success since then is basically attributable to the standard of its providing and the problem of opponents to copy. Programmatic strategies depend on ML strategies and knowledge. As extra knowledge is ingested into the fashions, they enhance. Being a first-mover in a extremely technical area tends to create pure benefits within the type of higher fashions and knowledge because the enterprise scales. The Commerce Desk has the best ranking vs friends on Gartner which underscores the platform’s high quality.

Independence & Price Effectiveness

Superior know-how solely takes you up to now when competing towards the most important firms on the earth, so what else differentiates The Commerce Desk? Independence. The Commerce Desk is solely a demand-side platform in contrast to Google and Fb which frequently leverage their present platforms to behave as each provide and demand of ad-inventory. Google and Fb could also be incentivized to push their very own ad-inventory to advertisers even when the stock just isn’t optimum – along with controlling the worth of the stock. Each Google and Fb make a majority of their revenues off promoting, highlighting the shortage of independence as demand-side platforms. This dominance of each provide and demand by walled gardens, Google and Fb, has been extensively scrutinized, even resulting in a number of antitrust fits. One by the US Justice Division had this to say:

“The criticism filed at this time alleges a pervasive and systemic sample of misconduct via which Google sought to consolidate market energy and stave off free-market competitors,” stated Deputy Legal professional Normal Lisa O. Monaco. “In pursuit of outsized earnings, Google has brought on nice hurt to on-line publishers and advertisers and American shoppers.

The businesses have been even alleged to be colluding to achieve additional management of the ad-market – additional underscoring potential conflicts of curiosity.

The Commerce Desk, then again, has constructed belief with clients as a purely demand-side platform with advertisers greatest curiosity in thoughts, specifically diminished price and elevated ROAS. The corporate even lately launched a brand new sub-floor bidding tactic permitting advertisers to bid decrease than what SSPs are asking, which provides extra readability on demand for stock and helps advertisers get decrease costs. This tactic can also be in effort to take away the center man (SSPs) in favor of options like TTD’s OpenPath which connects advertisers on to publishers to skip the added prices. This belief with advertisers has helped the corporate succeed previously and I believe will proceed to offer The Commerce Desk aggressive sturdiness.

Elementary Drivers & Valuation

TTD shares took a dive 24% after its Q3 launch again in November, primarily pushed by decrease This autumn income steerage than anticipated by analysts ($580M vs $611M estimated). Revenues are usually seasonal with most progress in This autumn however YoY progress charges have cooled since Q1 of 2022:

But, full yr 2023 progress is predicted to be within the low 20’s. Administration attributed slower progress to harder YoY comparables and macro challenges however is optimistic for 2024 and 2025:

First, clearly, the macro atmosphere performs a job in our enterprise and issues like greater price of capital and elevated cash provide have downstream results on most companies. A few of these results are alternatives which we’re seeing principally throughout our shopper base however we’re seeing a few of these results as pressures on their companies. However whatever the macro atmosphere’s results on particular person firms, we proceed to see the tidal wave of alternative over the subsequent 2 years.

As well as, Wall Road analysts are predicting topline progress to common about 20% yearly the subsequent 5 years in keeping with Searching for Alpha. My base case income forecast holds progress of 16% yearly via 2032 because the agency captures CTV and Retail Media demand, alongside advantages from a rising share of the identification market. The forecast assumes TTD maintains and barely grows its historic take fee of round 20% and slowly expands its market share of general digital promoting spend:

The Commerce Desk boasts sturdy gross margins within the low 80’s which have expanded time beyond regulation because of its capital gentle mannequin and economies of scale. The corporate has demonstrated strong profitability previously however has seen depressed working margins and returns on capital on account of elevated working bills.

Particularly, basic & admin margins have almost doubled the final 5 years from 18% of revenues to 33%. Administration additionally plans to extend headcount 15-17% in 2024 which is able to inevitably develop working spend. It seems to be as if management is spending extra to maintain its traditionally sturdy income progress, which has harm profitability and factors to a scarcity of working leverage. That is an space I will probably be on the lookout for enchancment in 2024. My base case has gross margin averaging 83% and working margin climbing to 29% in 2032. Moreover, my base case holds that fastened and dealing capital funding will stay near historic averages:

• Capex at 3% of revenues
• Depreciation & Amortization at 50% of Capex
• Change in Internet Working Capital averaging about 3% of revenues.

Lastly, I launched an upside and draw back case and assigned chances to every. This enables us to check a variety of assumptions and estimate the chance of potential outcomes. As you possibly can see from the beneath outcomes, every case has vast variability in implied share worth, with presently extra draw back than upside primarily based on the case assumptions. Moreover, I assigned a likelihood to every case, with the heaviest weight given to my base case. Even with the next likelihood of the upside case, the result’s an anticipated worth of $36.20 or 82% draw back.

Dangers & Uncertainty

Along with aggressive threats from giant companies like Google, Fb, and Amazon, The Commerce Desk faces just a few exterior and inner dangers to pay attention to. The digital promoting trade is a dynamic one. Regulation and structural shifts can create an unsure working atmosphere, as we’ve seen with the depreciation of Cookies, Apple’s knowledge privateness modifications, and a myriad of antitrust fits. The Commerce Desk is among the few DSPs to succeed in such scale and has navigated the promoting waters for over a decade, which provides them sturdiness in my opinion. Digital promoting can also be intently tied to the patron. A contracting macroeconomic atmosphere creates tighter advertiser budgets and might hurt TTD’s efficiency. The corporate has proven resilience via 2022 and 2023 although with nonetheless sturdy progress and inventory worth efficiency.

Internally, extreme stock-based compensation (‘SBC’) has been a criticism and presents an actual price to shareholders. Share buybacks have helped curb the dilutive impact of SBC, but it surely nonetheless is a considerable 27% of TTM revenues. Founder and CEO Jeff Inexperienced additionally holds 48% of voting energy, which provides key particular person threat. Nonetheless, Inexperienced has led the corporate effectively and appears to proceed this development.

Conclusion

The Commerce Desk has outperformed the broader digital promoting trade and has constructed belief as an solely DSP. Quite a few tailwinds inside CTV, Retail Media, and Identification look to make the corporate a long-term winner. However typically an excellent firm just isn’t an excellent funding. TTD seems to be far too overpriced and has seen cooling progress and elevated working spend. Ought to costs come down and profitability enhance, I’ll look so as to add shares.