TMT Weekly: CHTR, MDB and the TTD Bull Case

TTD Bull Case

I’m familiar with TTD (The Trade Desk) from my time working in M&A for an agency holdco. TTD was both a great service and an existential threat for performance marketing agencies. A pure performance marketing agency has two core functions: hands on keyboards to run campaigns, and design to create the ads. Margins used to be stellar, but have already been compressed to single digit percentages of ad spend for big clients, though some margin remains in unsophisticated SMB. Now there are numerous AI image generators that can create photo-realistic images, and the ad copy to boot. All of the big Madison Avenue creative agencies have discovered TTD, and the reviews tend to be glowing. As GOOGL and META improve the automation of their ad buying platforms, the role for pure play performance marketing agencies continues to diminish. I was familiar with that part of the bull case for TTD, the “software replaces people” part, but what I hadn’t fully grasped was how much TTD would benefit from the growth of over-the-top (OTT) / connected TV (CTV) advertising, or the extent to which large brands were creating their own walled gardens using TTD’s tech.

Before we get going, I want to be clear that nothing in this post is investment advice. Stream by AlphaSense can help you make better capital allocation decisions, but you still have to be the one to decide.

In this excellent expert call transcript, a VP of a competitor puts TTD’s future outlook ahead of META and GOOGL:

“[TTD is]  in a very unique position relative to the marketplace and I feel that they are probably in one of the most advantageous positions as it stands today… from their growth trajectory and future outlook I put Trade Desk very much ahead of Google and even Meta.”

–[Competitor] – Vice President of Sales (Current)

META’s primary challenges are 1) the move to privacy, particularly by AAPL, has obscured ROI, and 2) user demographics.

“[META have] had a really hard time with Apple’s privacy measures and it’s really hurt advertisers’ ability to really give Meta credit for the media that they’re doing and the results people can get… you can’t even visibly show cost per acquisition for things like tickets sold and other things now. You can do return on ad spend but it takes a little bit of rejiggering.”

If you just look at the demographics of their user base, it’s not going to go well for them in the future.”

–[Competitor] – Vice President of Sales (Current)

GOOGL’s primary challenge is their reliance on cookies and inability to implement a new tracking solution that meets privacy laws without killing their business.

“Google touches more of the Internet than any single other entity. Third-party cookies have been the way that we’ve been able to track individual users and continue to monetize them. There’s a lot of privacy legislation out there, the tracking, GDPR in Europe, CCPA here in the United States. They’ve been trying to move away from the use of cookies in the browser to protect themselves from the liability….

They can’t get it right because it kills their business if they were to do this in ‘the right way’ soon.”

–[Competitor] – Vice President of Sales (Current)

GOOGL’s inability and/or unwillingness to solve their cookie problem has allowed TTD to take share with their Unified 2.0 identity product, further engraining them with creative agencies.

“They’re now saying it’s going to be several more years from now. They just don’t have an answer because it doesn’t serve their business well. They’re dropping the ball on this in a big way which is really allowed Unified 2.0 which is Trade Desk’s identity solution as well as LiveRamp’s identity solution. People are adopting that at a decent clip right now.”

–[Competitor] – Vice President of Sales (Current)

TTD has a $75 billion market to attack due to TVs being connected to the internet:

“If you look at advertising as a percent of GDP, it hasn’t moved all that much. Just ballparking it in media spend, TV is $75 billion and $100 billion or so is digital.

Traditional TV buying is so [bad] relative to digital. I would say Trade Desk is going to benefit from attacking that rather than duking it out with Facebook and Google for direct response.

If most ad dollars sit at the agency holding companies and Trade Desk is the platform of choice for those holding companies, by default they’re going to be the winners of that. It’ll be between them and Google. They’re the only two who are that well ingrained in the agency-holding company ecosystem.”

–[Competitor] – Vice President of Sales (Current)

This expert has quite strong views on the direct response model, which mirror my own. When do you click on banner ads? You don’t have to tell me, I already know that it’s when you’re about to click something on your phone that definitely was not a banner ad, but the webpage jumped, placing a banner ad under your finger the split second before you click. Am I right? No? Ok, well I bet you can count on one hand the number of times you’ve intentionally clicked on a banner ad this year. Anyway, this expert agrees…

“Direct response is garbage business. I only say that because it’s algorithmic, it’s R&D. It’s, ‘how do you make your data collection, data harvesting processes really good against specific outputs?’ That is never going to happen from banners and other stuff.

If you remember the last time you actually clicked on a banner ad, you probably haven’t ever or it was a mobile ad and it was an accident. Banners are not going to get it for you. What’s interesting is retailers like Target, Walmart, CPG companies like Hershey’s, Uber, DoorDash, Kroger, Precision Media, Amazon, CVS, Rite Aid, all of these companies are starting their own walled gardens… they’re using their customer data in a closed network on their own properties and running media ads for that. That is the future for direct response in the near term.

1) they don’t want to use Google because Google’s very difficult to deal with… and 2) [TTD’s] Unified 2.0 is an agnostic solution. It is more likely that Trade Desk would let you use that identity solution for your own purposes… they are the technology platform that all these other companies are building their own walled gardens around.

They’re the infrastructure of choice because candidly they’re the only ones who could do it outside of Google.”

–[Competitor] – Vice President of Sales (Current)

To recap the bull case

• TTD could take share from GOOGL and META due to privacy/ walled garden issues
• TTD could take a material portion of the $75 billion TV market
• TTD could take direct response ad spend for big brands creating their own walled gardens

Is there a bear case? When I look at broker reports in the AlphaSense platform, they have titles like “Does TTD Eat the Open Internet? Raising PT. (Needham & Co.).” and “Diamond in the Rough” (Evercore ISI Research). A diamond that’s going to eat the internet… feels bullish.

The expert above does mention MSFT acquisition XANDR, which won the initial rights to sell NFLX ads.

The other piece of Microsoft is Xandr, X-A-N-D-R. That was their automation platform that they acquired. It really wasn’t doing much to be honest with you.

With the Netflix ad agreement, Xandr will now become the plumbing that supports advertising. Netflix, it’s going to be a shiny object in the beginning when they release some of their inventory. While Netflix did not pick Trade Desk, I would imagine Trade Desk will be the first “outside company” to get access to Netflix inventory once Microsoft is no longer the exclusive partner.

–[Competitor] – Vice President of Sales (Current)

Is that a bear case? I guess if TTD doesn’t get access to NFLX’s ad inventory in two years, then that would be bad. That might mean XANDR & MSFT inherit the CTV/OTT bull case.

I did find a contrarian take in another expert call transcript from the top transcripts list below.

[In a recessionary environment], programmatic dollars will definitely see a bigger hit than your bottom-of-funnel dollars. If I were to rank them, The Trade Desk would see a bigger share of the cut in media spend versus Facebook, and then Facebook versus Google.

–[Customer] – Director (Current)

Ok so TTD takes first hit in a recessionary environment, but the title of this transcript is “Customer Believes TTD Has Sustainable Moats Including Tech Advantages and Scale,” so I’m going to put this into the “buy the dip” category. Not investment advice! Seriously, do your own research.

Top 10 Expert Call Transcripts – Communication Services – Week Ending Sept 23, 2022 

1. GOOG (Alphabet Inc) – Customer Sees GOOGL as the Dominant Advertising Counterparty but Does Not See an Opportunity to Outgrow
2. CHTR (Charter Communications Inc) – Former Director Thinks That Incumbent Broadband Providers Have a Huge Advantage
3. GOOG (Alphabet Inc) – Former Sales Manager Sees Out of Home Advertising as Largely Protected From Structural Change
4. GOOG (Alphabet Inc) – Former Sales Director Believes GOOGL Cloud Is Superior to Top Competitors in Many Ways and Is Set to Continue to Gain Market Share
5. TTD (The Trade Desk Inc) – Customer Believes TTD Has Sustainable Moats Including Tech Advantages and Scale
6. GOOG (Alphabet Inc) – Former Accessibility Consultant Thinks Every Company Needs to Care About Digital Accessibility
7. SPOT (Spotify Technology S.A.) – Former Client Partner Believes SPOT Will Have a Tough Time Generating Meaningful Podcast Revenues Without Major Franchises
8. SPOT (Spotify Technology S.A.) – Customer Believes Measurement Is Still Difficult When Advertising on SPOT
9. DIS (The Walt Disney Company) – Former Supplier Believes Disney+ Has a Significant Value Proposition Due to Its Deep Multi-Generational Libraries
10. WBD (Warner Bros. Discovery Inc) – Former VP thinks DIS is the Best Positioned Streamer

Very tough to decide which of these to highlight. I know that SPOT will drive engagement on Twitter, but I’m pretty sure making content creation decisions based on Twitter is the way to madness.

Reading another CHTR transcript is like eating your vegetables. It’s not very exciting, but it’s absolutely necessary to survive as a TMT investor. I like this type of question, which is basically asking, why would there ever be increased competition among internet providers in tier-one markets?

Analyst: Let’s say you are a fiber overbuilder. When does it make sense to go into a tier-one location, if at all?

Honestly, it’s rare that it would make sense. Tier two, it makes a lot of sense, but tier one, mainly because the right-of-ways are owned by the major providers already. A fiber overbuilder has got to have access to right-of-way conduit. If they can get that, then maybe it makes sense. If they’re coming in literally to build their own from scratch, meaning they’re negotiating their own right-of-way, they’re getting their own trenches, they’re laying their own conduit, I can’t see it make any sense in a tier one market…. There may be a rare exception. Now, they do make sense though to do the middle mile that connects them. An overbuilder coming in to do middle mile to connect markets makes a lot of sense.

If you have a middle-mile provider who can come in and provide backbone that is high quality, high speed and secure and managed well between markets, then you’ve really extended the ability to do point-to-point services more efficiently and more effectively without doing so many connections. Historically, if you’re calling from the East Coast to the West Coast, then you may be traversing eight or 10 providers to do that because you’re tapping on and off a network.

–Charter Communications – Director (Prior)

It appears that my internet bill will remain high.

Top 10 Expert Call Transcripts – Information Technology – Week Ending Sept 23, 2022

1. ADBE (Adobe Inc) – Former VP Believes ADBE Continues to Enjoy Strong Structural Tailwinds and Growth Opportunities but Needs to Adapt to New Customer Segments and Improve the Ease of Use
2. NVDA (NVIDIA Corp) – Partner Believes Companies Are Investing More in AI Recommendation Systems
3. CSU (Constellation Software Inc) – Former Director Respects CNSWF’s Contrarian Investing in Software
4. ADBE (Adobe Inc) – Former Director Believes ADBE’s Experience Cloud Has Very Valuable Offerings but Lacks Sufficient Integration to Drive a Compelling Proposition Like SHOP
5. MSFT (Microsoft Corp) – Customer Thinks DBX Is Cheap Enough to Just Pay as Opposed to Deal With Switching to Another Vendor
6. SNOW (Snowflake Inc) – Former Corporate Account Executive Believes SNOW Was Very Focused on New Logo Expansion Pre-IPO but Lately Has Shifted to Focusing More on Renewals
7. MDB (MongoDB Inc) – Customer Sees the Majority of Database Spending Shifting to MDB With a Preference for Atlas
8. TTD (The Trade Desk Inc) – Customer Believes TTD Has Sustainable Moats Including Tech Advantages and Scale
9. MA (Mastercard Inc) – Former VP Thinks India Has a Lot of Headroom for Growth for the Networks but the Central Banks Are Bringing a More Stringent Approach to the System
10. WDAY (Workday Inc) – Former Sr. Director Thinks There Is a Lot of Runway Left Among Enterprises for WDAY’s Financial Solutions

I already covered the ADBE transcript last week due to the Figma acquisition. It’s a great transcript. Don’t let the somewhat innocuous title of #2 fool you: that NVDA transcript’s engagement is off the charts. It’s incredibly technical. You better want to really understand the interaction between AI engines, programming languages, and GPUs and other specialty chips.

I’ll highlight the MDB transcript. This is the Sr. Manager of a customer of MDB (MongoDB) explaining the lack of features and difficulty in estimating cost of the AMZN AWS noSQL database, DynamoDB.

“DynamoDB is a NoSQL system. It is a managed service provided by AWS. If we compare it to say, Mongo, for example, the database has quite a few limitations… indexing structure is way more advanced in Mongo. Collections or tables structure in Mongo is way more advanced as well. 

The cost of DynamoDB really depends on the bandwidth that your workflow will be actually running on DynamoDB. That cost may grow exponentially after certain levels are hit. In my experience, it’s hard to get a straightforward estimate on that part…. you would need a perfect idea of how much database reads, writes, your workflow will introduce to the database… not easy to estimate properly. 

However, if you go with MongoDB, you decide to use MongoDB Atlas, it’s just an estimate based on the size mostly of the database and your indexes. That’s the part that you probably have a very good idea about beforehand. It’s just a few clicks and you can get a precise cost estimate.”

–[Customer] – Senior Manager of Database Engineering (Current)

You do have to decide where the capital goes, but you don’t have to do it alone.