The Trade Desk's TAM Problem

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The Trade Desk’s TAM Problem

It is full employment season for anyone writing about The Trade Desk. Since its disastrous slightly bad earnings a week ago, a lot of takes have been taken, and I would be remiss, dear reader, if I was left out in the cold.

First a recap:

• Trade Desk’s earnings come in shy of expectations

• This is really bad optics since it happens on the same day AppLovin kills. Cue the “changing of the guard” themes

• Our [former] savior Jeff Green posts on LinkedIn a rah rah message. On the conference call he focused on a reasonable … 15 point plan … to turn around the company. Confidence is not restored.

• BOK chimes in saying the company is great, but not innovative

• Chis Vanderhook chimes in saying the company actually sucks (paraphrased)

• Brian Wieser analyzes the data in helpful ways (subscription required)

• Stock continues to fall in an overall down market

I’m sure I missed some of the takes.

In any event, as a former competitor in the DSP market, I’ll give my take on where this company is headed and the size of its opportunity.

TAM - Total Addressable Market

For ad tech insiders the criticism of TTD’s stock has always been whether the company could possibly justify the value given the market it operates within. In other words, how big could it get if it absolutely “won” the market.

For better or worse, (other than the recent foray into TV OSs)TTD has been very conservative about the markets in which is plays. It is fair to say the company’s addressable market can be tightly defined as cross-device non-social programmatic advertising globally ex-China. On the pod this week, Ross Benes told us that the US RTB programmatic market (how they describe non-social) is about $44 billion in the US. We can guesstimate that means the global ex-China number is probably $75-ish give or take some billions.

We know that the total media dollars flowing through TTD is in the $14 billion range. so easy math says $14/$75 = 18.6% market share. Personally, I have a bit of a hard time believing this number as it seems too low — if you assume Google and Amazon are roughly in the same ballpark as TTD, the three of them combined would only have a bit over half the market, leaving a huge amount of fragmentation on the remaining half — fragmentation that I don’t think SSPs or other observers see in reality. So I think the actual market is smaller, maybe closer to $60 globally, which would put TTD’s market share above 20%.

SAM - Serviceable Available Market

Looking at TAM, if TTD is growing quickly, has a leadership position, and has sub-20% market share that implies a lot of growth to come. That’s where SAM, or Serviceable Available Market, comes into play. How much of the overall market is effectively unavailable to TTD no matter what they did?

Short of major structural changes to the market, its the part controlled by the Walled Gardens. TTD is not bidding on Amazon Fire or YouTubeTV any time soon. And those are some of the fastest growing consumer platforms supported by advertising. Meanwhile, the “open web” (see previous newsletter: The S&P 500 — no, not that one!) is struggling, to say the least.

Let’s say that the entire TAM ultimately gets split three ways between TTD, Amazon, and Google, and literally every other company in the space falls to the wayside. They would give a current SAM for TTD of $25 billion ($75/3), or roughly double where they are now.

Share of Wallet expansion

The amount of media dollars flowing through programmatic is only half the story, The next element is the take rate that TTD or others can earn on each dollar. This is where the company has been pushing hard, despite not disclosing much or any details on the public.

We all know that the overall “ad tech tax” (I hate that phrase so much), is quite high, and maybe only 40-50% of each dollar spent goes to publishers. To paraphrase Jeff Bezos (and quote myself in a previous newsletter) your ad tech tax, is my opportunity.

If TTD’s current take rate is in the low-20% range, and there’s another 30-40% of each dollar being taken by other members of the supply chain, that implied another doubling of the opportunity ahead, irrespective of TAM/SAM. Make no mistake, OpenPath and the Identity Alliance are efforts in exactly this direction, to take margin from SSPs and data providers, respectively.

I said on my pod last week that i had heard rumors TTD was building a buy-side ad server to compete with the newly merged FlashTalking/Innovid. This is another example of grabbing additional share from the same transaction, though in hindsight given the company’s recent struggles, wouldn’t an Innovid acquisition for <$500 million have been a much easier path?

As TTD expands its take, every move threatens to bump into partners, and potentially upset customers. This path is necessary for the company, but fraught.

Horizontal expansion

Increasing share of wallet within programmatic can be thought of as a vertical strategy — grabbing bigger pieces of the same programmatic pie. What about vertical growth? Within the buy side of programmatic, the market is heavily segmented (see DSP Segmentation) and it appears like TTD is increasingly focused on its sweet spot of large agencies and brands. (Brian Wieser points out that its largest customer now accounts for 14% of revenue.)

There are a lot of big, buy-side markets where TTD is not especially competitive:

• Small/regional agencies

• DTC/Shopify brands

• App install marketing

• CTV specialists

• DOOH specialists

• Low cost markets like LATAM and India

• etc

Will it continue to cede these markets forever?

Should I sell my stock?

I have no idea, I am not offering financial advice.

Here’s what I’m saying in a nutshell:

• This company is a clear category leader

• They have chosen to operate in a very well defined (and thus limited) market

• There is still a lot of opportunity in this market, but it is not unlimited. They could double their size doing the same thing, and maybe double their share of wallet as well

• But they are also ceding a lot of ground to others.

Reading list

• X allegedly tells IPG to spend more or risk Trump admin backlash (link)

• Amazon putting big pressure on CTV CPMs (link)

• Netflix to possibly bid on Sunday NFL (link)

• Walmart ad business $4.4b, growing 27% on the year (s/o Ryan Barwick from Morning Brew) (link)

• “Movement for the Open Web” exists and comes out swinging against Sandbox, claims it “doesn’t work” (link)

• Dave Helmreich new Triplelift CEO (link)

• OpenWeb resolved dispute w/ founder/CEO, he’s back as advisor to CEO (link)

• Hightouch (no longer self identifying as a CDP) raises $80m on $1.2b (link)

• Backlash against Honey, creators filing lawsuits (link)