There have been a slew of “advertising technology” companies in the IPO market over the last few years – Critio (CRTO), Rocket Fuel (FUEL), and the Rubicon Project (RUBI.) Criteo has held up the best while the others have faded away as the frantic pace of innovation in advertising technology has left them behind. For anyone that wants to get an in-depth but entertaining look at all should consider reading Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley.

Trade Desk (NASDAQ: TTD) is one of the latest so is enjoying the fruits of a strong technology/product cycle in terms of programmatic ad buying.

A key positioning aspect of the story is that they are allied completely with the advertiser versus companies like Google and Facebook which provide technology more to increase their own monetization.

Advertising spend should shift from search to digital video, audio and mobile – could be good for Spotify and Pandora (P.) The part of advertising that generates demand should be more outside of search.

CEO understands the problem well – you do a search on a travel to Barcelona and you get ads for travel there non-stop for months. It’s not just moving to digital/programmatic but who will be in control of what happens there. Focus of the CEO is on price discovery and rating effectiveness. About $10B in spending today is programmatic. That’s out of $640B total global ad spending.

Market efficiency is only 40% right now. That’s going to improve and some are going to get squeezed. 95% of TTD business comes through managed service arrangements and so is more stable.AD spending is NOT efficient

When might companies spend less on highly specific search? For example….

Technology story:

Step one build a data management platform (data warehouse).

Step two build a decision engine on top of the warehouse to make better decisions. Claim is that you can’t separate these two.

The secret sauce is expressiveness. More specific search terms – “mortgage” becomes “refinance my mortgage with 5/1 ARM” implies going to more complex and granular system which for TTD is “bid factors.”

Think about pricing “yield curves” based on geography alone. Add time since last visit and other factors and you might have 15,000 bid combinations for a single scenario.

Programmatic still very small for example in one case out of an $8B budget only $65M is programmatic. TV over the internet will be ad funded but could be fewer, more targeted ads. (We can only hope.)

Very high ROIC business.Revenue growth of 156% YoY at profitability. Very high revenue productivity in terms of $/employee.

Most revenue growth is being driven by existing clients. The MSA model is “sticky” but not really subscription based.

Revenue growth slowed in 1H2016 which is odd. Profits however are expanding rapidly.  High net margins are mostly a function of having low sales and marketing costs of less than 25% of revenue.

The Deal and Valuation

The company is offering 4.7 to 5.4M shares and at the new $17 mid-point that’s a $90M deal. Total shares outstanding after the IPO will be 38-39M shares for a market capitalization of $660M. 2016 revenues should be on the order of $200M which puts the P/S multiple at 3.3x.

The valuation is not demanding considering Google is trading at 7x sales. I know they are Google but TTD is growing faster and has a business model that should generate similar profit margins.

If we put the 7x sales number on it is easy to see the stock at $38-40/share. If we do a full IV we will send it out and update this post.

We will have a transcript available of this roadshow soon. See the TTD IPO Slide Deck for more information.

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