Uncommon Idea: Cloud-Based Advertising The Trade Desk TTD

The Uncommon Idea in Brief

Buy The Trade Desk (TTD) stock for the long term. (Published Aug. 27, 2017)

– Build a long position between $45 to $50. Add aggressively in the $40 to S$42.50 range.

The Industry Opportunity

The world isn’t moving online, it is online. Advertising is chasing those consumers from traditional media to the web, mobile and desktop.

– Market: The total market for online spot marketing was more than $14 billion in 2015 and continues to grow each year. EMarketer projects that video ad spending alone will reach $14.77 billion by 2019.

– Native Video Advantage: Native video is video uploaded or created on social networks and played in-feed as opposed to links to videos hosted on other sites. These formats are specific to each social platform and designed to maximize video engagement, discovery and distribution. Nearly 90% of U.S. marketers and agencies have adopted or are beginning to adopt native advertising. Highly targeted video ads in a native environment result in a better experience for the consumer, leading to higher brand recall and engagement.

What Does TTD Do?

The Trade Desk is a tech company that offers its self-service, cloud-based platforms to buyers of advertising. Through its platform, buyers can create, manage and optimize data-driven digital advertising campaigns across ad formats, including display, video, audio, native and social on a multitude of devices including computers, mobile devices and connected televisions. The integration with major data, inventory and publisher partners ensures maximum reach and decisioning capabilities. Furthermore, enterprise APIs enable custom development on top of the platform.

The Uncommon Market Position That Sets The Trade Desk Apart

The Trade Desk’s latest features have propelled them to the front of the class for online advertisers. The company’s offer of native video that can extend for up to five minutes allows advertisers to tell stories rather than simple blurbs or single line hooks. Effectiveness and results are a key for advertisers, so understanding the success of native video or other online advertising is key. TTD’s new reporting tool provides a simple and easier way for users to garner campaign insights. The enhanced customization capabilities lets users include or exclude metrics from standard templates or build their own. Advertisers can use the results to optimize their advertising campaign to achieve maximum performance. The company further integrated reporting with Placed to allow customers to measure how well their digital advertising drove in-store foot traffic.

Financials – The Trade Desk Offers Impressive Numbers

TTD once again delivered strong numbers for the second quarter as it earned $18.8 million on $72.8 million in revenue. The 54% increase in revenue produced $10.7 million in cash from operations, pushing TTD’s cash position to almost $116 million on virtually no debt. That translates to $2.91 in cash per share. Net income grew from $7.6 million a year earlier while earnings per share surged to $0.43 per share from $0.15 per year over year. On a non-GAAP basis, TTD earnings reported $0.52 per share, an impressive increase from $0.22 per share a year earlier.

For the fifteenth-consecutive quarter, TTD’s customer retention rate exceeded 95%. Year-over-year growth in mobile in-app, mobile video and connected continued to impress at 87%, 171%, and 167%, respectively. Mobile increased to over a third of gross revenue for the quarter, highlighting the importance of this channel to advertisers.

Third-quarter revenue is anticipated to grow to $76 million with an EBITDA of $21 million. Management guided revenue higher for the remainder of the fiscal year. Expectations are for revenues of $303 million, up from expectations of $291 million just last quarter. EBITDA of $88 million is also expected on the year, an increase from the $78 million management expected last quarter.

The Technical Analysis – On a Breakout Over $58 or Pullback to $48, TTD is an Optimal Technical BUY

The Trade Desk, TTD
Click for a larger image.

For a relatively new stock, The Trade Desk has developed some very clear price patterns since hitting the public markets in 2016. Since the big earnings push higher in May, the stock has developed a wide consolidation channel. The $57 to $58 area has formed a strong resistance level, while support has developed between $48 to $50.

The primary concern with the recent action of the past three months is how sharply the stock retreats after hitting resistance. The first attempt at $58 saw shares pull back within two weeks after back-to-back weeks of testing $58. The most recent attempt saw shares pullback from $57 to test $48 in a single week. The challenge becomes the grind. Buyers needed nearly two months to retest $58 after the first pullback. If it takes another two months, the slow grind of the move higher met with a sharp decline a third time might damage the emotional capital of bulls. The concept of “we’ve worked so hard and so long to see all that work wiped away in a week” could become prevalent and create more aggressive sellers fearing another attempt at resistance would be met with selling.

While secondary indicators like the Stochastics RSI and Stochastics are tepid, this has been the area where the stock performed well in May, so it may encourage buyers. The caveat here is earnings pushed price in May and we did not see a pop in price after the August earnings release.

This setup provides two entry options: buy the breakout or buy a successful test of support.

A weekly close over $58, despite being $7 higher than the current price, is still a possible trigger. The expectations for both the Stochastics and Stochastics RSI is one of strength and potentially overbought status. There is no technical resistance level above $58, so a measured-move-target the size of the channel would come into play. This targets $68 on the upside.

A secondary approach is to buy a successful test of $48 where the stock does not close under the $48 level for consecutive weeks. This becomes a range trade where one would expect the stock to move between $48 and $58 in a gentle, rising fashion. A trader entering in this fashion must ironically consider selling if shares hit $58, but fail to close above that level. At the very least, a trailing stop or partial profit trade should be considered.

Volume has been volatile since the May earning release, but the bigger-volume weeks have occurred during moves higher, which can be interpreted as a longer-term bullish sign. Aggressive buyers and timid sellers is the preference here.

Should the $48 level support fail, we’d anticipate a new consolidation channel to develop between $37 and $48. Unfortunately, wide trading channels are common with TTD, but this is the area where we’d expect investors to become more aggressive buyers for the longer-term.

Catalysts for the Thoughtful Investor on Why The Trade Desk Is a Buy

The Trade Desk has redefined online advertising by using real-time bidding for smoother and more effective sales by employing analytics with a sharp local focus. Their platform makes it possible to more quickly message specific ideas to specific people rather than by writing big checks to traditional media and hoping the commercials for their products are seen by the right people. Buyers of advertising can log onto TTD’s website and target only the ads that meet their target audience.

With outlets in the United States, Europe, Asia, and Australia, TTD is able to make advertising more effective by deploying massive amounts of data over curated ad formats. When a consumer lands on a webpage, watches internet-connected television or uses a mobile application, this sets into motion a programmatic bidding auction for advertising inventory. Auctions often occur in as quick as one-tenth of a second.

The recent updates to TTD’s platform released a native video functionality that hosts creative workflow that supports video upload, completion rate metrics and creative safeguards. The aforementioned curated data aim to eliminate repetitive messaging to improve the overall experience for the targeted audience. Studies show consumer appreciation for a product drops the second time they view the same ad during a show or program. TTD plans to increasingly associate its ad technology with Roku and other streaming media services. Combining these aspects with the use of native video should drive TTD’s growth moving forward.

The Bottom Line

1. The Trade Desk is an emerging leader in online advertising.

2. TTD’s real-time bidding provides for smoother and more effective sales. The use of analytics with a sharp local focus combined with customizable reporting tools enable advertisers to employ a campaign that results in a non-cliched biggest bang for its buck.

3. In the range of $48 to $50 we like TTD as a long-term buy and hold. Over $58, we like TTD as a momentum breakout long. The small-cap nature, short interest and neophyte status as a public company will make it volatile.

4. TTD’s native video offering allowing for longer, more targeted advertising with less repetitive messaging to improve effectiveness.