$TTD Focusing Only On The “Buy Side” Of Online Advertising Demand

During his recent interview with Tobias, Joe Frankenfield, Portfolio Manager at Saga Partners, discussed $TTD Trade Desk Inc – Focusing Only On The “Buy Side” Of Online Advertising Demand. Here’s an excerpt from the interview:

Tobias: Do you want to talk about a few names that you have in the portfolio?

Joe: Sure.

Tobias: Well, let’s talk about Trade Desk. What is Trade Desk? Can you walk us through the opportunity there?

Joe: Sure. Trade Desk is a platform for ad agencies to purchase ad inventory. Customers, our advertisers, like Nike, Procter & Gamble, any company that’s trying to advertise, and then basically suppliers is anything connected to the internet. It could be a website, it could be audio, visual, connected TV. And we came across the Trade Desk in mid to late 2017, and very fortuitously, like, I think was my partner, Michael Nowacki, he went to some networking event or some marketing event where someone at his table said their son worked there, and was raving about the company and saying how great the company was. And that’s enough to be like, “Oh, it’s publicly traded. We’ll look it up.”

We’re always just awkward opportunistically looking for ideas. It’s one of those few moments where like, you open up the investor presentation and you listen to the Investor Day CEO speaking, like the stars align, you’re like, “Wow, this company has something very special.”

We didn’t know a lot about the ad tech space at the time. We started digging and learning about the different value chains within the ad tech network. We even contacted one of the guys we know in Silicon Valley that works with a lot of tech companies and asked him about demand-side platforms, which is what Trade Desk is. He said, “I won’t touch that with a 10-foot-pole, it’s a commodity.” There’s a history of although they’re publicly traded companies in this kind of screwing over shareholders, not being shareholder-friendly. But when you look at the numbers, you look at the story, it was very appealing. And the reason why is because basically, they are trying to give ad agents that use the highest ROI on their ad dollar. And the way that they do that is by analyzing the world of inventory that’s available. espn.com, google.com, Facebook, all the content where you might want to advertise. And there’s inherent economies of scale in that where it costs money to look at the whole world of inventory, and then you only get paid when the agency actually purchases one of the inventory. So, you have to have this high fixed cost, and then the largest company in the space is going to do really well or have an advantage.

At that time, there are other DSPs or demand-side platforms that look weaker. And so the thesis was that the Trade Desk did establish themselves as the dominant independent demand-side platform and hence at that point, I mean, multiples are very low and potentially for what they could be doing in 5, 10 15 years. Since then, the thesis has evolved to the point where all those other independent demand-side platforms have either been acquired or gone out of business. There’s like one or two left, like MediaMath is still out there. But there have been reports where MediaMath is trying to sell itself as well. And the reason why they want is because, basically, they had a better way, algorithmically, a cheaper way to figure out which ads to place accurately for ad agencies. Also, they only serve the demand side, while allow these ad tech firms also serve the supply side of inventory. So, there is an inherent conflict of interest, where they were taking a big take rate, which was uneconomical for anyone that’s trying to advertise.

Basically, they have a platform that is very scalable, that has wide, growing barriers to entry and it’s a huge market because if you think about how advertising used to be transacted, it was like the old Madman era where you go to get a martini lunch and you have your ad budget, and then try to allocate it to the three national networks and then do on a handshake lunch. Well, now it’s using data. So basically, the Trade Desk is figuring out what is the best way to advertise. Basically, what they’re disrupting is no data versus using data. A lot of these disruptors are disrupting company that has an inherent interest in not being disrupted. So, they have to battle them. Basically, it’s a Greenfield opportunity.

There was a saying, with advertising, 50% of advertising worked, you just didn’t know which 50%. Well, now the Trade Desk can determine which 50% works. Well, the ad space is supposed to be a $1 trillion business globally by 2027, I believe. And how much of that of those ad dollars will go over a platform like Trade Desk to then be allocated and what’s going to be the take rate? Well, right now, like the argument still why Trade Desk is still very attractive, even though it’s been a– I think 13 bagger for us, since we first bought it three years ago, is that a lot of people are scared of Google and Facebook. Google and Facebook are the most powerful internet companies, software companies in the world, like how are they able to compete with these very strong companies? Well, the key to the Trade Desk is they’re independent platform. They’re not biased, where you allocate ad dollars. Google and Facebook are biased. They have demand-side platforms, DSPs, but that’s not their core business. Their core business is selling content. They’re selling advertising on facebook.com, google.com and youtube.com.

One statistic I read is, for every dollar that goes over the Google’s DSP, maybe 60, or 65 cents of that dollar goes on a Google property. For every dollar that goes over the Trade Desk, it might be like 25, or 30 cents goes to Google. And so obviously, the Trade Desk doesn’t care where you spend money, we’re just trying to help you as the advertising agency trying to figure out the best ROI for the ad dollar. It’s like Amazon versus Shopify. Amazon can’t compete with Shopify. Amazon is the consumer-facing brand, where they create this really good consumer experience. Shopify is the infrastructure supporting these other e-commerce sites. For Amazon to go head to head with Shopify, they would have to change your business model. Google and Facebook are not going to change their business model, which is a very lucrative successful business model. For Trade Desk, which is just to allocate ad dollars. Inherently, this is going to be the winner. It’s a winner, virtuous cycle type business model, where eventually how much of those ad dollars are going to go over the Trade Desk platform, and they’re in the advantage relative to the suppliers of inventory.

There’s this general theme that a lot of our companies have and that we’ve come to really appreciate is how the internet has impacted a lot of the economics of businesses across the economy. If you think about the value chain of a business, there’s suppliers, there’s distribution, and there’s customers. Those are the three main things for any value chain. And historically, a lot of the companies that have had these excess economic returns, control distribution and then integrated backwards to control, supply, restrict supply, you can go to General Electric, US Steel, IBM, these companies restricted access to supply. These internet companies, they basically are opening up supply. There’s infinite supply, especially if you’re talking about like content, and so now it’s gone to become controlling the customer experience. If you control the customer experience, you are in power. It’s like the Googles, Facebooks, Amazons, Netflixs of the world.

Consumers, customers, they don’t know how to filter, an infinite supply of whatever it may be in whatever industry it may be. Well, now what the Trade Desk is doing is controlling the customer experience. They’re on the demand side for decipher the infinite supply of inventory. That similar thesis that we’ve seen play out in many other companies, but one of those businesses where– I think it takes investors a long time and to evolve where you go from, I guess, a lower multiple investor and trying to really look out 5, 10, 15 years about what will the fundamentals do to support the current valuation. And for these platforms that are highly scalable, that have established themselves as the winner, or at least looks like the winner in this space, they can grow revenues at 50%, 60%, 70% a year, depending on what type of industry or the growth of the end markets. It’s interesting.

The reason why you reached out originally to me was on Twitter, I posted something about growth expectations. I posted something that I was doing analysis about saying, like, “What’s a reasonable expectation for growth companies?” You have to be reasonable, because you have to look back last 10 or 15 years, and how many of these companies actually compounded at 30%, 25%, 20%. If you find one that does that, the multiple from current fundamentals, it’s a very high multiple that you can pay, but there’s very few companies that actually do this. And so you have to have conviction that you found one and make sure there is some type of margin of safety baked in– [crosstalk]