Mad Hedge Technology Letter
December 11, 2020
Fiat Lux
Featured Trade:
(THE DIGITAL AD INDUSTRY COMEBACK)
(TTD), (GOOGL)
Posts
It’s been a helter-skelter year for tech investors and The Trade Desk (TTD) is one of those examples of a company whose fortunes have gone from rags to riches.
The spring started off with unrelentless economic pressure forcing companies to slash their marketing budgets to preserve capital.
One of the victims were digital advertisers.
The Trade Desk's shares cratered 40% but has since reversed course and is up more than 200% so far this year.
That’s not to say that in today’s digital marketing world, we have utter clarity – we don’t.
But uncertainty around the pandemic and the notion that digital marketers have seen the worst of is starting to get baked into the pie which is why we are seeing this massive share appreciation into the end of the year.
The light is starting to appear at the end of the tunnel and companies that slashed their marketing budgets or advertising budgets are starting to ramp up spending as they plan their budgets for 2021.
Through all of this, I am thoroughly impressed with the robustness of The Trade Desk's business model, evident in its third-quarter 2020 results.
While most companies faced enormous headwinds, The Trade Desk reported record revenue of $216 million, up 32% from last year.
Net income more than doubled to $41 million thanks to the company's revenue growth and operating leverage.
This demonstrates the nimbleness of the business, which continued to profit during a once in a 100-year recession.
Consensus was expecting $181 million, and overdelivering by these wide margins is one of the catalysts shepherding the incremental investor into The Trade Desk.
It was only in the 2nd quarter that year-over-year revenue was actually down 13% and then to go from down 13% to up 32% is quite outstanding.
Last year when the company was mushrooming, revenue was up 38% for the year pointing to more signs that the company is back to where it was pre-COVID.
That in itself is a huge victory in the digital ad world.
Breaking out some of the segments, Connected TV was one of The Trade Desk's biggest growth markets.
Connected TV revenue grew over 100% year-over-year, and that was from a strong quarter last year.
Mobile video spending grew 70%, and audio spending grew 70%.
The Trade Desk obviously has its mojo back.
The Trade Desk will go from strength to strength as the vaccine starts to roll out to parts of the developed world and consumers start to return to spending behavior that looks more pre-COVID.
Another bullish sign is that founder Jeff Green is still CEO of the company and owns more than $5 billion of The Trade Desk stock.
As an owner-operator, Jeff has the incentive, as well as the clout to lead the company toward success.
He has a stellar track record.
TTD’s revenue rose 14-fold between fiscal 2014 and fiscal 2019 and has been profitable since 2013 all while many “growth” companies have been burning cash.
TTD is well-positioned to improve on its growth on the back of two major secular trends: the continued migration toward digital advertising and the transition to programmatic advertising.
Data suggests it owns around 1% of the total global ad market - the total addressable market stands at $725 billion.
Clearly, the runway for a company like this is long if they can execute which they have shown consistently is the case.
Compare this with Google (GOOLG), a firm that has mature businesses that rely on ad revenues, and they have had an interesting year enduring some of the elements like TTD because it's a sudden major recession out of the blue.
Companies have used the opportunity to cut their ad spend and rightly so because that’s what happens in recessions, but the interesting fact about TTD is that the TTD is in the sweet spot for where ad money is going to go.
It's throwing the ball to where the wide receiver will get open in the back of the endzone and that's a game-changing takeaway about this company.
In terms of recent cash spend in the U.S., around $600 million to $700 million of the $1 billion that's been spent on this presidential election for advertising goes to TV. It goes to TV ad spending, and that's fourth-quarter ad spend, not third-quarter. Most of that money has been spent in October, and not only that, that big chunk of ad spend goes into just one week.
There is no doubt in my mind that a significant chunk of that flowed through to TTD.
When you think about programmatic advertising next year that goes on TVs, even smart TVs, we have got the Summer Olympics in Japan along with the European soccer tournament that starts in June 2021.
This means huge revenue bumps as big events bring in many unique opportunities.
These are just some of the whispers going on in the industry and I also believe that 2021 will be a year to remember for the digital ad companies.
Remember that consumers are spending, but not on travel, people aren't flying to Bali or Phuket, but they are consuming content online.
I can truly say that the Trade Desk isn’t just a flash in the pan company and that long term, the prospects are incredibly positive for this company, and obviously, that is starting to reflect in a quickly appreciating stock.
Mad Hedge Technology Letter
November 20, 2019
Fiat Lux
Featured Trade:
(MY CURRENT TECHNOLOGY TRADING STRATEGY),
(GOOGL), (MSFT), (APPL), (ADBE), (AKAM), (VEEV), (FTNT), (WKDAY), (TTD)
Some might say that we were due for a revaluation of growth tech stocks.
They have contributed greatly in this nine-year bull market.
Profit-generating software stocks are the order of the day.
Tech has led the overall market higher after projected quarterly earnings growth of -9% came in better than expected at -5%.
We have ebbed and flowed from pricing in a full-out recession in mid-2020 to now believing a recession is further off than first thought.
The pendulum swing ruptured many growth stocks from Workday (WKDAY) to The Trade Desk, Inc. (TTD) plummeting 30%.
We have retraced some of those losses but momentum in share appreciation has shifted to the perceived safer variation of tech stocks.
Investors have cut volatility and headed into bulletproof companies of Apple (AAPL), Google (GOOGL), and Microsoft (MSFT).
These companies have significant competitive advantages, Teflon balance sheets, and print money.
The tech markets just about priced in the U.S - China trade war in the fall as broad-based volatility plummeted because of optimism around making a deal.
This, in turn, has boosted chips stocks along with investors front running the 5G revolution and the administration granting Huawei a reprieve was a cherry on top.
The Mad Hedge Technology Letter has taken every dip to initiate new longs in safe trades like software companies Adobe (ADBE) and Veeva Systems (VEEV).
Tech is at the point that all loss-making companies are out of the running for tech alerts because the moment there is a recession scare, these shares drop 10% and often don’t stop until they lose 30%.
Now there is a deeply embedded set of narrow tech leadership by a few dominant tech companies buttressed by a select set of second-tier software stocks.
I would put PayPal (PYPL) and Twitter (TWTR), which I currently have open trades on, in the ranks of the second tier and they should do well as long as economic growth does better than expected.
Their share prices dipped on weak guidance and the bad news appears to have been shaken out of these names.
Professional investors could also be hanging on to meet end-of-year performance targets.
I do expect unique entry points on software stocks that drop after bad future guidance.
Profitability has moved to the fore as the biggest factor in holding a name or not.
Newly minted IPOs have fared even worse showing the markets' waning appetite for loss makers like Uber (UBER) and Lyft (LYFT).
Loss-making companies often tout their ability to change the world and disrupt industry, but that has been discovered as nothing more than a ruse.
They aren’t disrupting the way we change the world. For example, Uber is a dressed-up taxi service and the new CEO has failed to create any new momentum in the unit economics that spectacularly fail by any type of metric.
Even worse for these growth stocks, as the economy starts to falter, there will be even less appetite for them, and even more appetite for safer tech stocks.
A worst-case scenario would see Uber drop to $10 and Lyft to $20.
New all-time highs have crystalized with Google (GOOGL) under the gauntlet of regulation hysteria displaying the domination of these big tech machines.
The ongoing, consistent rotation out of growth and into value hasn’t run its course yet and fortunately, by identifying this important trend, our readers will be well placed to advantageously position themselves going into 2020.
Growth stocks won’t make a comeback anytime soon and deteriorating conditions could trigger renewed synchronized global monetary policy easing and central bank stimulus.
And yes, more negative rates.
I believe Oracle (ORCL), Fortinet (FTNT), Akamai Technologies, Inc. (AKAM) could weather the storm next year.
Tech growth is slowing and trade uncertainty is high, and readers must have a sense of urgency to avoid the losers in this scenario.
U.S. economic growth could slow to 1.3% next year, avoiding a recession, and the lack of enterprise spend will reduce software sales and combine that with peak smartphone growth and it won’t be smooth sailing.
The Mad Hedge Technology Letter has the pulse of the tech market and will show you how to navigate this minefield.
Mad Hedge Technology Letter
August 29, 2018
Fiat Lux
Featured Trade:
(THE BEST TECH STOCK YOU’VE NEVER HEARD OF),
(TTD), (AMZN), (GOOGL), (NFLX), (BIDU), (BABA), (SPOT), (P), (FB)
If you asked me which is the best company that most people do not know about then there is one clear answer.
The Trade Desk (TTD).
This company was founded by one of the pioneers of the ad tech industry Jeff Green, and he has spent the past 20 years improving data-based digital advertising.
Green established AdECN in 2004 and its claim to fame was the world’s first online ad exchange.
After three years, Microsoft gobbled up this firm and Green stayed on until 2009 when he launched The Trade Desk. This is where he planned to infuse everything he learned about the digital ad agency into his own brainchild.
Green concluded that creating a self-service platform, avoiding privacy issues, and harnessing big data for digital ad campaigns was the best route at the time.
Green hoped to avoid the pitfalls that damaged the digital ad industry mainly bundling random ads together that diluted the quality and potency of the ad campaigns.
It did not make sense that a digital ad for baby diapers could be commingled with an ad for retirement homes.
Green created real-time bidding (RTB), which is a process in which an ad buyer bids on a digital ad and, if won, the buyer’s ad is instantly displayed on the selected site.
This revolutionary method allowed ad buyers to optimize ad inventory, prioritize ad channels, and boost the effectiveness of campaigns.
(RTB) is a far better way to optimize digital ad campaigns than static auctions, which group ads by the thousand.
In real time, advertisers are able to determine a bespoke ad for the user to display on a website. Green used this model to develop his company by building a platform tailor-made to execute (RTB).
Naturally, he won over many naysayers and his company took off like a rocket.
Results, in a results-based business, were seen right away by ad buyers.
A poignant example was aiding a performance-based ad agency in trimming ad waste by more than 50% for a national fast food chain with thousands of locations across America.
It took just one year for The Trade Desk to carve out a profitable business as ad agencies flocked to its platform desiring to take advantage of (RTB) or also commonly known as programmatic advertising.
Customer satisfaction is evident in its client retention rate of 95% for the past few years highlighting the dominating position The Trade Desk possesses in the digital ad industry.
The Trade Desk has not raised fees for ad buyers lately, but the value added from The Trade Desk to customers is accelerating at a brisk pace.
A great value proposition for potential clients.
The vigor of the business was highlighted when Green cited that each second his company is “considering over 9 million ad opportunities” for their ad inventory shows how The Trade Desk is up to date on almost every single ad permutation out there.
This speaks volume of the ad tech, which is the main engine powering the bottom lines at Google search and rogue ad seller Facebook (FB).
Google only gets 63,000 searches per second and shows that The Trade Desk has pushed the envelope in providing the best platform for ad buyers to seek its perfect audience.
Green’s mission of supporting big ad buyers optimize their ad budget has really caught fire and in a way that is completely transparent and objective.
The foundations that Green has assembled became even more valuable when Alphabet (GOOGL) chose to remove DoubleClick IDs, which would now prevent ad buyers from cross-platform reporting and measurement.
Previously, DoubleClick ID could cull data from assorted ads and online products based on a unique user ID named DoubleClick ID.
Ad purchasers then would data transfer to pull DoubleClick log files and measure them against impressions served from other ad servers across the web.
Effectively, ad buyers could track the user through the whole ad process and determine how useful an ad would be to that specific user.
In an utter conservative move to satisfy Europe’s General Data Protection Regulation (GDPR), DoubleClick IDs are no longer available for use, and tracking the ad inventory performance from start to finish became much harder.
Cutting off the visibility of the DoubleClick ID in the DoubleClick ecosystem was a huge victory for The Trade Desk because DoubleClick ID measured 75% of the global ad inventory.
Ad buyers would be forced to find other measurement systems to help calculate ad performance.
Branding and executing as the transparent and fair ad platform helping ad agencies was a great idea in hindsight with the world becoming a great deal more sensitive to data privacy.
The Trade Desk is perfectly placed to reap all the benefits and boast excellent technology to capitalize on this changing big data landscape. It is already seeing this happen with new business wins including large global brands such as a major food company, a global airline, and another large beverage company.
The global digital ad market is a $700 billion market today and trending toward $1 trillion in the next five to seven years
The generational shift to mobile and online platforms will invigorate The Trade Desk’s bottom line as more big ad buyers will make use of its proprietary platform to place programmatic ads.
Content distribution systems are fragmenting into skinny bundles hyper-targeting niche content users such as Sling TV, FuboTV, and Hulu.
There are probably 30 different ways to watch ESPN now, and these 30 platforms all require ad placement and optimization.
Some of the names The Trade Desk is working with are the who’s who of digital content ownership or distribution including Baidu (BIDU), Google, Alibaba (BABA), Pandora (P), and Spotify (SPOT) -- and the names are almost endless.
It’s the Wild West of ads and content these days because TV distribution has never been more fragmented.
Content creation avenues are desperate to boost ad income and are increasingly attempting to go direct to consumers.
Ad-funded Internet TV barely existed a few years ago. And ad inventory is all up for grabs benefitting The Trade Desk.
All of this explains why the stock is up more than 180% in 2018, and this is just the beginning.
The growth numbers put Amazon (AMZN) and Netflix (NFLX) to shame.
The Trade Desk scale on inventory has spiked by more than 700% YOY.
The option to hyper-target increases as more ad inventory is stocked.
Management mentioned in its second-quarter performance that “nearly everything went right. We executed well and one of the most dynamic environments we've seen.”
It is one of the most bullish statements I have heard from a public company.
Quarterly revenue ballooned 54% YOY to a record $112 million, and the 54% YOY growth equaled the 54% YOY growth in Q2 2017.
Ad Age's top 50 worldwide advertisers doubled ad spend in the past year positioning The Trade Desk for continued hyper-growth, not only for 2018 but in 2019 and beyond.
Mobile spend jumped nearly 100% YOY, accounting for 45% of ad spend on the platform, which is 400% higher than the industry average for mobile ad spend according to eMarketer.
Data spend was also a huge winner rising by nearly 100% smashing another record.
In the meantime, the overseas business continued its robust growth in Europe and Asia, up 85% YOY.
The Trade Desk confidence in its performance chose to increase guidance to $456 million for the year, a 48% YOY improvement.
When upper management says “when we see surprises, they typically are to the upside” you take notice, because this tech company is perfectly placed in a growth sweet spot.
Massive developing markets are just starting to dabble with programmatic advertising. Markets such as China will see it become the new normal soon, opening up even more business for The Trade Desk.
The Trade Desk is also rolling out new products that will automate more of the process and reduce the number of clicks.
Wait for the pullback to get into this ad tech stock because even though it is up big this year, we are still in the early innings, and shares will march even higher.
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Quote of the Day
“I have a deep respect for the fundamentals of television, the traditions of it, even, but I don't have any reverence for it,” – said Netflix chief content officer Ted Sarandos.
