Unlike most linear businesses, it does not get weighed down by size. The bigger The Trade Desk (TTD) gets, the stronger its business gets. It has high operating leverage which requires nominal costs to support increasing ad dollars to go over its platform.
Trade Desk’s competitive advantage comes from its economies of scale. In order to be effective, Demand Side Platforms (DSP) must look at all available auctions being run. Looking at each auction costs money even if no bid is made.
The Trade Desk picks inventory for its advertising customers from over 500 billion digital ad opportunities every single day, which is expected to cost over $300 million in platform operation expenses this year. If another DSP had half as much ad spend as the Trade Desk, to be as effective they would still have to look at all 500 billion ad opportunities, but platform costs per ad dollar would be twice as much. This makes it very difficult for a subscale DSP to be profitable.
Over the next five years, programmatic ad spend is expected to grow at a 15% CAGR, reaching ~$120 billion by 2028. The Trade Desk should continue to take share of programmatic ad spend going forward rising from an expected ~16% share in 2022 to 25% share in 2028. That would provide gross ad spend on The Trade Desk of $30 billion and assuming a 20% take rate provides $6 billion in revenue, growing at a 30% CAGR. Operating margins are likely to be 40%.
Looking further out. $30 billion in ad spend in 2028 is still a drop in the global ad spend bucket. There is a potential future where all digital advertising is allocated programmatically over a single platform and that platform could very well be The Trade Desk, in which case it would be one of the most valuable businesses in the world.
Thanks for the idea go to Saga Partners Q2 2022 Investor Letter
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