The Trade Desk Poised to Benefit From Digital Advertising Spending's Growth

Director

Michael Hodel

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The Trade Desk has become one of the leading technology platform providers for advertisers and their ad agencies to purchase ad inventory made available by various publishers or content providers. We expect this demand-side platform provider, which helps ad buyers manage programmatic ad campaigns, will benefit from the ongoing growth of digital advertising spending. 

The Trade Desk’s independence—it does not own media that could create bias in ad purchases and placement—likely has increased the trust of brands and their ad agencies in the firm’s platform. This position contrasts with Google's platforms, which remain dominant but have lost share in serving ads to non-Google publishers, and Amazon's rapidly growing ad business. The Trade Desk also provides methods to enhance data sharing and interoperability. Its platform is integrated with publishers or their supply side platform providers, which allows the firm to better utilize its clients’ and the publishers’ data to optimize addressable ad campaigns in real time and measure campaign results. Over the past five years, The Trade Desk has increased its client count by about 50% to reach more than 1,100 ad agencies and other ad buyers. Revenue per client has also increased nearly three-fold over this period as the firm has expanded its capabilities and the number of data sources clients can access.

The connection between and translation of data from many different sources has become the top priority for all participants in the digital advertising market as connections have weakened, thanks to changes in Apple’s privacy policies and Google’s plan to eliminate third-party cookies. The Trade Desk is investing in creating an encrypted user identifier, referred to as UID2. If widely adopted, the integration and utilization of data from multiple sources would become less costly and more efficient, increasing the effectiveness of digital ads. While The Trade Desk does not sell UID2 and only considers it an industrywide initiative, the identifier could attract more advertisers to its platform. However, the firm faces fierce competition from the likes of LiveRamp and Google on this front.

Business Strategy & Outlook

We assign The Trade Desk a no-moat rating. The firm’s technology is an important component of automated (programmatic) digital advertising, which eMarketer estimates represents around 90% of digital display ad spending. Advertisers and their ad agencies represent the demand side of the programmatic digital advertising market as they seek ad inventory to purchase from publishers (the supply side). Advertising technology providers like The Trade Desk help optimize advertisers’ digital ad campaigns by automating various processes such as matching campaign objectives with publishers’ content and the type of audience they attract, bidding on ad inventory, delivering ads to the publishers, and compiling, managing, and analyzing data to improve the ad effectiveness. 

The entire process takes a few milliseconds. When a webpage loads or an app is opened, The Trade Desk is notified by the publisher (webpage or app) that ad inventory is available. The firm’s platform then matches the request with an ad. This matching occurs based on the user’s attributes, such as demographics and location, and its advertiser clients’ preferences, such as target audience and the format of the ads they’d like to display. If these various factors are matched, the advertiser (or its ad agency) places a bid via The Trade Desk. If the publisher (or middle players on its behalf) accepts the bid, then the ad content is delivered via an ad server (in-house with the advertiser or offered by The Trade Desk) for placement on the website or app. 

The Trade Desk is developing a network effect. As the firm's client base (mainly advertising agencies) and average usage grow, its reach with publishers should expand as well. We estimate that gross spending on its platform has consistently increased at a faster rate than growth in digital ad spending in recent years. However, we don’t have confidence that this dynamic will create a competitive advantage. Most advertisers and agencies use multiple demand-side platforms, or DSPs, which could push providers to price their platforms more aggressively or accept lower take rates to attract volume. 

On the intangible asset front, we do not believe The Trade Desk’s capabilities are differentiated enough from its competitors. The firm’s technology can utilize its clients’ first-party data and combine it with data purchased from third parties, like other DSP providers. When optimizing ad campaigns, The Trade Desk and other DSPs work with data management and data connectivity platform providers, which gather user data from various sources and attempt to match them with the data they receive from publisher requests to identify specific users or cohorts to target. 

The Trade Desk is currently one of the leaders in developing new means of identifying and tracking users. It has used its technological know-how to create UID 2.0, a user identifier that could lessen the impact of the extinction of third-party cookies. UID 2.0 is based on user emails. It is encrypted, and as it passes from publishers to advertisers or advertisers to publishers through various devices, additional security features are placed on the identifier. If widely adopted, the integration and utilization of data from multiple sources would become less costly and more efficient, increasing the effectiveness of digital ads. While The Trade Desk does not sell UID 2.0 and only considers it an industrywide initiative, the identifier could attract more advertisers to its platform. However, there are other third-party cookie replacement options provided by LiveRamp and Google.

Lastly, while there may be some indications of customer switching costs as a competitive advantage, we aren’t confident they can be maintained for at least 10 years. According to management, more clients have begun to sign two- to three-year joint business partnership agreements, which is an improvement from the one-year master services agreements that most of the firm’s clients have been signing. With joint business partnership agreements, it is more likely that the firm will customize its offering for various clients based on their needs, while the clients will further integrate and customize their in-house platform with The Trade Desk by using the firm’s application programming interfaces. However, such exclusivity should be discounted as there could be other DSPs with preferred status with the same advertiser but based on different products or campaigns and their various objectives.

None

Economic Moat

Trade Desk

The Trade Desk, Inc. engages in the provision of a technology platform for advertising buyers. It operates through the United States and International geographical segments. The firm's products include audio advertising, mobile advertising, native advertising, data management platform, cross-device targeting, and inventory and marketplaces. The company was founded by Jeffrey Terry Green and David Pickles in November 2009 and is headquartered in Ventura, CA.

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The Trade Desk, Inc. engages in the provision of a self-service and cloud-based ad-buying platform. It operates through the United States and International geographical segments. The firm offers omnichannel advertising, audience targeting, solutions for identity, application programming interface (API), custom, and programmatic, measurement and optimization. The company was founded by Jeffrey Terry Green and David Pickles in November 2009 and is headquartered in Ventura, CA.