simpson33
The Trade Desk, Inc. (NASDAQ:TTD) is scheduled to report 3Q22 results at 8am ET on 11/9. In 2Q22, Trade Desk reported above-consensus results and guided Q3 revenue of at least $385 million (+28% YoY) and adj. EBITDA of $140 million. Over the last 8 quarters, The Trade Desk has consistently delivered above guidance while similar companies have been struggling in a worsening macro. Despite being a blossom in the dessert, shares of the independent DSP has been selling off recently likely due to investors trying to de-risk Q3 earnings following a series of weak results and underwhelming outlook from peers.
Recent earnings in the digital ad sector
In October, Snap Inc. (SNAP) reported 3Q22 revenue of $1.1 billion that increased just 6% YoY as management noted weakness in both DR (direct response) and brand advertising. Management again did not provide Q4 guidance, but was hopeful of a flat Q4, implying a full year 2022 revenue growth 12% to $4.6 billion (analysis here).
Later in October, Meta Platforms (META) reported a 3.7% YoY decline in advertising revenue to $27 billion. The 17% YoY increase in impressions was offset by an 18% YoY decline in ad pricing due to FX impact, lower-priced regions, and a soft demand environment where strength in healthcare and travel was offset by weakness in gaming, e-commerce, financials and CPG. Turning to Q4, revenue is expected to decline by 7% YoY on a strong dollar and a broad-based slowdown in advertising (here).
Despite search advertising being commonly understood as a safe haven in the digital ad budget, Google (GOOG, GOOGL) saw its search business grow just 4% (10% ex-FX) in Q3, while both YouTube and Google Network revenue fell 2% YoY. Management again did not provide any quantified guidance for Q4, but noted that results will continue to be impacted by a difficult macro and will face tough comps as revenue grew 32% in 4Q21 (here).
As a CTV (connected TV) beneficiary just like The Trade Desk, Roku (ROKU) saw Platform revenue grow 15% in Q3 (above consensus), but warned of a challenging Q4 (Platform revenue will likely decline 6% YoY). Management noted a weak scatter market and that big advertisers are “not spending with anyone.” The scatter market mainly involves advertising that does not belong to any upfront commitment, so advertisers can literally turn off their campaigns in just one click (here).
On the SSP side of the digital ad value chain, PubMatic (PUBM) and Magnite (MGNI) will report Q3 results after market close today (11/8) and tomorrow (11/9), respectively. The Street expects PubMatic/Magnite to grow revenue by 15%/9% YoY in the September quarter.
What to look for from Trade Desk’s earnings?
The most important thing to look for is any weakness in CTV advertising, given video advertising (incl. CTV) makes up more than 40% of Trade Desk’s platform ad spend, followed by mobile (high 30%’s), display (15%), and audio (5%). CTV is commonly understood as a structural trend, as Trade Desk estimates the global TV advertising TAM to be ~$250 billion with a CTV penetration of just 6.4% ($16 billion). So investors will be looking for clues on whether the story remains intact.
Since Roku already pointed to a weak scatter market, investors will pay close attention to what Trade Desk management sees in the current environment. That said, it’s important to understand that Roku’s performance is not always indicative of Trade Desk. This is because both companies operate under very different business models, as discussed in my previous article:
Put simply, Roku is essentially a walled garden that needs to rely on (1) hardware sales to drive user growth and (2) proprietary content asset like the Roku Channel to drive user engagement. Trade Desk, on the other hand, has no business in the content game and merely functions as a digital ad platform that helps major agencies like WPP and Omnicom manage their CTV campaigns.”
Aside from CTV, markets will be looking for progress in UID2 as an alternative to 3rd party cookies. Apple’s IDFA barely has any impact on Trade Desk since CTV is not exposed to Apple’s privacy policy. While cookies may impact some display advertising, display accounts for 15% of platform ad spend so this is unlikely to be perceived as a major concern.
Any further progress in retail media ($100 billion in total addressable market, or TAM) will likely be discussed as companies are increasingly shifting to a 1P data strategy in a world where device IDs and cookies are becoming less relevant. Already, The Trade Desk has established partnerships with retailers including Walmart (WMT), Walgreens (WBA), and Albertsons (ACI) (analysis here).
Lastly, investors may want to get a better sense of the trajectory of the company’s stock-based compensation (SBC), which totaled ~$250 million (36% of revenue) in 1H22 due to a very generous package awarded to CEO Jeff Green. In this environment, markets will want to see good old-fashioned GAAP earnings rather than “adjusted” figures that add back the luxurious SBC to inflate earnings. Therefore, any indication as to when and how SBC will moderate from current levels will be greatly appreciated on the earnings call.
Overall, The Trade Desk has executed exceptionally well against a very difficult macro backdrop where most digital ad players are struggling. While the company may not be completely immune to the current down cycle, its dominant position on the demand side of the ad tech chain has understandably led to above-average growth. From a valuation standpoint, however, the multiple is indeed demanding at 10.7x 2023 revenue. This is a significant premium to peers at 2-4x. As a result, I maintain a neutral rating on The Trade Desk, Inc. stock.
Be the first to comment