1.
$Trade Desk Inc.(TTD)$ is my top growth stock pick now. It's dominating advertising on the open internet. The market massively discounts its future growth and runway at 30 times forward earnings. Here is my full investment thesis:
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2.
What does TTD do?
It's a giant in programmatic advertising.
It's basically serving ads on the internet through auctions facilitated by ad exchanges and tracking the performance data to enhance performance of further biddings.
Here, CEO Jeff Green explains it:
3.
How does $Trade Desk Inc.(TTD)$ do that?
It owns and operates a Demand Side Platform (DSP).
In the open internet, there are millions of ad spot providers, from blogs to video streaming platforms.
They can't sell ads individually and advertisers can't contact with all of them individually.
Instead, they upload their inventory to a supply side platform (SSP) that aggregates available ad spots and puts them on ad exchanges.
DSPs connect to those ad exchanges.
When an ad slot needs to be filled, ad exchange sends a message to DSP to get an offer. DSP makes an offer on behalf of a client.
The highest bid wins the ad place.
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4.
It makes money by cutting commissions.
In the whole advertising ecosystem, there is only one player paying the bills: Advertisers.
DSPs, Ad Exchanges and SSPs all cut their commission from the gross paid by the advertiser.
DSPs located closest to the money side in this chain:
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5.
TTD is dominating this market.
It's the third largest DSP in open internet after Google and Amazon and it's the largest DSP that doesn't also own an ad network.
Despite its strong position, it only controls 2% of the market, meaning it has a long runway ahead.
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6.
Business has been exploding lately...
It posted 30% average annual revenue growth in the last 5 years despite the post-Covid slow down in digital advertising.
Its net margin is currently 16% which is compressed because its aggressive reinvestment to expand market share.
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7.
Its balance sheet is among one of the strongest in the whole industry.
It has more than $1 billion net cash position and over $2.9 billion equity.
Meaning, it can weather any financial storm and it has ample resources available to ramp up investments.
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8.
It has superior capital allocation.
It has over 27% return on investment which is more than the double of the average ROIC of American companies, which is 12%.
This means that it's not just growing, it's also growing extremely profitably.
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9.
It has a giant opportunity to capture ahead.
Walled gardens' (Google, Meta and Amazon) market share of digital advertising peaked in 2021 and it's been declining since then.
This trend will only strengthen as AI will keep diverting traffic from the walled gardens, especially Google.
At this pace, TAM will easily go beyond $100 billion in the next few years and TTD is very well positioned to capture the lion's share.
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10.
Valuation is attractive.
Even if we assume its top-line growth will decline to 20% annual average for the next 5 years, we will get $6 billion revenue in 2030.
Assuming that the net margin will normalize at 35%, we will have $2.1 billion net income.
At 25 times earnings, we will get a $50 billion company, it's valued at $26 billion now, offering 14% annual return.
Given that the company will still have decades of runway to grow ahead of it, I will happily take 14% annual return now.
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