The Trade Desk: The retail media opportunity could be a powerful tailwind (NASDAQ:TTD)

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Introduction

The trading post (NASDAQ: TTD) remains an attractive growth story with robust secular tailwinds. While the CTV opportunity is well understood, Trade Desk has made some interesting efforts in retail media, a rapidly growing segment within the broader digital market. advertising space. In this article, I’ll explain why advertisers are increasingly viewing retail media as a valuable channel, the potential market opportunity, and what Trade Desk has done that will likely benefit the business from a number perspective. business.

What is retail media and why is it a big deal?

A retail media network is an advertising service owned by a retailer. A great example would be Amazon (AMZN) Advertising. Using proprietary customer browsing data and purchase history, Amazon can easily help advertisers find the most relevant audience with the highest commercial intent, essentially closing the loop between ad impressions and transactions. control.

The Ultimate Guide to Amazon Advertising

hubspot

The removal of third-party cookies by Google (GOOG) (GOOGL) and Apple’s iOS privacy settings (AAPL) are the reasons for the move to retail media. Google has announced that it will remove cookies on the Chrome browser by the end of 2023, while Apple has given users the option to block apps from tracking their activity (aka App Tracking Transparency or ATT) since the end of 2023. launching iOS 14.5 in April 2021. These developments have had major impacts on businesses that rely on cookies and device IDs to deliver and measure targeted ads. For example, parent Facebook (META) guided $10 billion in lost revenue due to ATT in 2022 and Snap (SNAP) reported that some lost signals will never be recovered.

This makes retail media an attractive place for advertisers because retailers have a direct relationship with their customers. By leveraging first-party data from retailers, advertisers can find the right audience and track ad performance within the same ecosystem, without having to rely on third-party data/cookies or develop a workaround for them. iOS privacy updates.

What is the total addressable market? How are the margins?

According to research by BCG and Google, the U.S. retail media market is expected to grow at an annual rate of 25%, from $36 billion in 2021 to $110 billion in 2026. The team estimates that 60% 70% of spending in 2026 will be net new spending, with additional dollars coming from organic growth and shifting to other digital channels and traditional advertising like TV and print.

TAM Retail Media

BCG

Additionally, research suggests that retail media is a high-margin business, with an estimated gross margin of 70% to 90%. This far exceeds margins on products in most retail verticals such as beauty (38%), home improvement (34%), sporting goods (31%) and electronics (23%). %). Another study by JPMorgan also shows that Amazon’s advertising segment (AMZN) has a gross margin of more than 80% and an operating margin of more than 40%.

Retail Media Gross Margin

BCG

Amazon Advertising

JP Morgan

What has Trade Desk done so far?

The most notable move Trade Desk has made on the retail media front is to work with the world’s largest retailer, Walmart (WMT) to develop the Walmart DSP (launched in 4Q21). This allows advertisers to leverage Walmart’s omnichannel customer data to launch ad campaigns outside of Walmart properties, with key information such as point-of-sale data and whether an item was purchased in-store or online. While Walmart will retain 100% of ad revenue within its own properties (e.g., walmart.com), Trade Desk could still benefit from increased ad spend on the platform as brands buy ad inventory through channels such as display, mobile and live TV on the Trade Desk platform. .

Following the Walmart DSP announcement, Trade Desk has formed partnerships with other major retailers like Walgreens (WBA) (launched 2Q22) and more recently Albertsons (ACI). Taken together, advertisers can now leverage customer data from over 4,700 Walmart stores, over 9,000 Walgreens drugstores and nearly 3,000 Albertsons supermarkets to run their digital ad campaigns on the Trade Desk platform. The list is unlikely to end there as more and more retailers look to capitalize on their proprietary data. It’s unclear what participation rates Trade Desk charges in these partnerships (no disclosure from TTD and WMT), but the platform’s overall advertising spend will likely be on the rise.

Conclusion

Trade Desk shares fell 50% in a monetary tightening cycle, but the company’s fundamentals remain strong and key tailwinds like CTV and retail media are largely intact despite macro conditions. . On 5/23, Snap’s Q2 earnings guidance sent shockwaves through the digital ad space as CEO Evan Spiegel pointed to a deteriorating macroeconomic outlook. On 5/26, however, Trade Desk reiterated its second quarter guidance of at least $364 million in revenue (+30% YoY) and adjusted EBITDA of $121 million. dollars (adjusted EBITDA margin of 33%). This shows that Snap’s problem might be more idiosyncratic than general.

On the valuation side, Trade Desk is still trading at a high premium to peers such as Roku (ROKU), Magnite (MGNI) and PubMatic (PUBM). But it’s important to recognize that markets have made this distinction in response to the company’s relative competitive position, secular tailwinds, and profitability. As a result, I continue to find equities attractive and believe that investors willing to look beyond the current market narrative (inflation, rising rates, war, recession, etc.) will be amply rewarded over the long term.

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