Last week I wrote an article explaining why I’m pivoting away from the bull thesis for The Trade Desk for 2020.
But first, I should discuss my original bullish thesis. It’s important to remember that The Trade Desk is a “demand-side” or “buy-side’ ad platform which allows advertisers to buy ads in auction-like format through real-time bidding. This is an automated method for buying and selling inventory that eliminates the need to call up an agency or salespeople to place the ad.
The Trade Desk’s financials and growth remain solid. Revenue grew 33% to $160.7 million with net income and EPS nearly doubling to $24.1 million or $0.50 EPS. Major growth categories include mobile video up 74% and connected TV ads up 100%. The Trade Desk also reported that customer retention remained at over 95%.
Previously, the company released its Q4 and 2019 results on February 27th. The total spend reached a record $3.1 billion in 2019, an increase of 33% year-over-year. Meanwhile, annual revenue grew 39% to $661 million with Q4 revenue growing 35% year-over-year to $215 million. Quarterly non-GAAP EPS was $1.49 compared to $1.09 in the year-ago quarter.
Looking forward, The Trade Desk was expecting revenue of $797 million for the year although this guidance was withdrawn.
The primary reason that The Trade Desk may be more exposed in 2020 is that they are not the publisher of the content where the ads are sold. For instance, Amazon Fire will fill their inventory first from Amazon’s DSP before pulling from the secondary market. As Amazon will likely illustrate, the only real moat that exists in advertising comes from owning the audience as a publisher or the device.
There is also little loyalty from advertisers who will quickly switch to the next best-performing programmatic DSP. Switching costs for ad exchanges are very low and this creates fickle behavior in times of distress.
At time of writing, forward price to sales is at 19. If/when The Trade Desk lowers its revenue guidance, the P/S will be nearly 25 P/S — or the highest in its history. The valuation skips this year’s revenue while assuming the following year will return to previous levels. In the current environment, this requires an enormous amount of speculation that runs counter to the facts that running ads is a lower priority in times of lower consumer spending.
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