Ever get the feeling someone is stalking you on the internet?
Monitoring every word you type... recording each mouse click… and following you around?
- That’s because you’re being “targeted.”
You write an email to your golfing buddies. Next thing you know, an ad for a new set of golf clubs is following you around to every website you visit.
This is called targeted advertising. And it’s a HUGE business.
Traditional advertising, like on billboards, is aimed at anyone who happens to see it. Targeted advertising, on the other hand, seeks to zero in on folks who are most likely to buy what you’re selling. In other words, your “target market.”
How do advertisers know what you’re likely to be interested in buying? There’s a whole industry dedicated to monitoring everything you do online.
Companies are constantly gathering data on you. They watch the websites you visit, the podcasts you listen to, and everything you do on social media.
- This data fuels online advertising…
And last year for the first time ever, advertisers spent more on internet ads than TV ads.
Online advertising has exploded 4X since 2009. The American internet ad industry now rakes in $80 billion a year… as much as the global toy industry.
American internet giants Google (GOOG) and Facebook (FB) dominate online advertising. In fact, they earn almost all their revenue from internet ads: 98% of Facebook’s revenue and 87% of Google’s comes from selling online ads.
Through targeted online advertising, GOOG and FB have grown into two of the largest, most powerful businesses in the world. Google is now the second-biggest publicly traded company in America, behind only Apple. Facebook ranks 8th.
- Targeted advertising is an extremely profitable business…
For example, FB has a net profit margin of 45%. That means it turned every $1 of sales into $0.45 straight profit. That’s off-the-charts incredible. It’s one of the highest margins I’ve ever seen for a business of Facebook’s size.
GOOG also has a healthy 20% margin. It runs a lot of nonprofitable projects that drag its margins down, like its self-driving car subsidiary Waymo. Still, a 20% net margin is double the average for America’s 500 largest companies.
This is a big reason why both firms trounced the S&P 500 over the past five years. FB soared 705% and GOOG climbed 155%... while the Index has risen 66%.
- Google and Facebook have disrupted traditional advertising…
Together, they swallowed up 63% of all digital ad spending in America last year. And because they dominate the industry… they set the rules for advertisers.
The digital ad duopoly has banned any “outside” measurement on their platforms. When you buy an ad with FB or GOOG, you can’t track its performance. You can only track the “average” performance across all the ads you buy. So, if you buy 50 ads, you have no way of knowing if 49 of them flopped and one accounted for all the sales.
And you won’t even know how much you paid for each ad. Advertisers are left totally in the dark about what worked and what didn’t.
Big customers are growing tired of this.
The chief marketing officer of Procter & Gamble, America’s biggest ad buyer, said this recently about Google & Facebook:
“We’re wasting too much money on a media supply chain with poor standards… [and] too many players grading their own homework.”
Procter & Gamble cut $200 million of spending with GOOG and FB last year.
- Advertisers are turning to a company that’s transforming the industry…
It’s called The Trade Desk (TTD). And its stock has soared 89% since January.
TTD’s goal is to transform the ad industry… so ads can be bought “just like stocks.”
The key thing to understand about online advertising is that it is ferociously competitive. Seven million ad “auctions” are held every second. At these auctions, business owners and advertisers buy space on the internet to display their ads.
Buying the right ad space is absolutely crucial. Get it right and your ad will thrive, generating many multiples of what you paid. Get it wrong and your ad will flop and your money goes down the drain.
TTD provides special tools and data to help advertisers make the right ad-buying decisions. Around two-thirds of its clients are American ad agencies.
Unlike on FB and GOOG, TTD’s clients can use their own in-house metrics to track ad performance. The end result is clients buy more effective ads. They get a higher return on investment and avoid blowing money on ads that don’t generate sales.
The most important stat is that TTD has a 95% customer retention rate over four years. This means 19 out of 20 companies that use The Trade Desk stick with it.
That’s outstanding; it even beats Apple’s 92% retention rate.
- More and more advertisers are switching to TTD…
On the latest investor call, CEO Jeff Green said in the last year new clients spent around $200 million on their platform. Its net profit or “bottom line” also surged by 148% last year.
Aside from its superb customer retention rate, what impresses me most about TTD is its 17% net profit margin. As I alluded to earlier, high margins are the sign of a great business.
And a 17% margin is great for a company that’s only nine years old… and operating in a ferociously competitive industry against none other than GOOG and FB.
- I’m not recommending TTD today. I don’t want you to “chase” it.
After TTD announced stellar earnings in May, the stock jumped 44% in a single day. And since then it’s up another 19%.
I want to own TTD. And I expect it to continue eating into the GOOG/FB duopoly. The internet ad industry is a giant $80 billion pot of gold, and I expect TTD to claim a larger and larger share of it.
But I’d like to see a pullback of around 15% to $75 per share before buying.
- I’ll let you know when it’s time to pull the trigger on TTD in the RiskHedge Report.
The RiskHedge Report is this free weekly essay you’re reading right now. Each week I’ll send you research, updates, and specific stock picks so you can profit from my top investment ideas.
If you have any questions, please write me anytime at riskhedgereport@riskhedge.com. I personally read every note that comes in.
Until next Thursday,
Stephen McBride
Chief Analyst – RiskHedge
