We’d like to set our sights on a few ad-tech names that may benefit from the Google antitrust lawsuit. It may feel like the words “Google” and “lawsuit” are commonplace, but the trial in September carries enormous weight and is unlike the lawsuits of the past. Not only do we want to identify what ad-tech names could benefit should Google’s monopoly be broken up and the juggernaut come out weaker, but we also want to be prepared if the tech giant is able to hold off regulators.
Considering that Google is sitting on the world’s very best consumer data, which is not an exaggeration in the least bit, its ability to lead on artificial intelligence and large language models should not be underestimated. For our purposes, the company is far from sitting on its laurels and there’s a predictable path where the company competes in a duopoly with Microsoft.
Therein lies the issue. Google undisputedly has the world’s best consumer data, but did this grow to become part and parcel with operating a monopoly? The Department of Justice has asserted anti-trust violations against Google with the trial beginning in September 2023. The trial is expected to last ten to 12 weeks, although a lawyer for the DOJ told CNBC it could be as brief as five weeks.
Why it matters:
With Google and other ad-tech companies trading this low, one of two outcomes will happen. The antitrust outcome will be mild, and Google will be empowered to continue to dominate. Or, the outcome will require the ad properties to be broken up, leading to a weaker stance for Google. This could benefit smaller ad-tech players.
The Goal — Looking back:
A few years back, I analyzed the potential outcome of a government decision when the Pentagon was evaluating cloud providers. Clearly, this decision is far outside of anyone’s control and requires some speculation. At the time, I speculated Azure would be a winner. For a year or so, Microsoft did secure the Pentagon contract over the more-favored Amazon. This decision was ultimately reversed, and the contract was split between four tech companies.
The exact outcome of the Pentagon contract was not particularly important because the analysis led to my conclusion that Microsoft’s hybrid computing was a material advantage and this would be the path Nadella would most likely use to take market share from AWS’s heavily-slanted public cloud strategy.
I’m hoping for something similar, which is to acknowledge something very important is going on with ad-tech, which is Google’s antitrust case. This is not a headline to simply dismiss. It’s the first time the DOJ has brought a case of this kind against a technology company since Microsoft. If there are even minor cracks in Google’s monopoly, there could stand to be a stock or two that starts a new trajectory.
On similar note, Cambridge Analytica is what sparked my coverage on Facebook. Similar to Google’s antitrust case, it became apparent to me that Facebook was peaking in terms of its ability to monetize through third party data. I covered this extensively, for example here and here.
Brief Overview of Antitrust Case:
According to Lanier Law Firm, which is the litigation team for the State of Texas in the state coalition case, a primary argument against Google is that the company went above and beyond to become the default search engine on iOS devices by paying Apple $12 billion per year.
The lawsuit includes other deals that Google struck with Apple’s Safari browser, the Mozilla browser and Android device manufacturers where Google either paid up or imposed restrictions on Android device makers to strongarm having their suite of apps pre-installed on the home screen.
The company has already lost an antitrust case in Europe in 2018 with a $4.4 billion Euro fine for forcing Android manufacturers to pre-install Google’s bundle of apps on the device, including Chrome, Maps and the Play Store.
Google’s market share of Search is at 91% and the argument is being made this was accomplished through anti-competitive practices, especially since Google owns Android and had leverage over the many device makers that used this operating system.
In addition to being pre-installed and the default browser/search engine, Google also attempts to keep people on its search engine by using a website’s data on its page. For example, if you look up “Best Dog Breed” Google scrapes Wikipedia and puts the results onto the search page instead of sending you to Wikipedia. This is seen as anti-competitive as it takes a website’s data to profit from it, rather than directing the traffic to the rightful copyright owner, which is the function of a search engine.
Part of Microsoft’s antitrust case was based on Microsoft using its dominance on Windows to force a Microsoft Explorer to be the default browser. At the time, the decision was that default settings are anticompetitive.
The secondary argument filed by a 10-state group led by Texas, is that Google leverages its properties to be the buyer and the seller via its ad exchange. Per Lanier Law Firm, the Texas case states Google and Facebook “unreasonably restrained trade and harmed competition through an unlawful agreement to allocate auction wins and to fix prices in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1”
This is where it gets very messy, and so I’ve dedicated a specific section below to break down these details. The purpose of understanding the minutiae is not to only determine if we should buy Google and when, but also what companies could stand to benefit if Google’s products are shutdown or broken up.
My long-ago analysis on Facebook pointed toward a conflict of interest in the company owning a third-party ad network called Audience Network while also being publisher. At the very least, the conflict of interest created a risk since Facebook was essentially siphoning oil from real estate the company didn’t own (iOS users). This was a serious, material risk for investors that played out over time (note: it certainly wasn’t immediate, it took four years from the first time I covered the topic).
If you’re a Meta investor, you’ll want to watch the CPMs on the company and make sure the erosion below is not permanent. Despite Apple only impacting third-party data, it’s unclear how much of that third-party data was informing its first party data. The unusually high CPMs that Meta charged points towards enhanced targeting – that in my opinion – was likely due to mixing both first-party data with third-party data. This means there will be an eventual erosion, over time, of the CPMs Facebook can charge even on its own applications.
Pictured above: Although subtle, there is an erosion to Facebook’s otherwise high CPMs. You can see that Nov 2022 made a lower high over Black Friday compared to the two previous years. Many factors could be at play, such as lower ad budgets, but it’s something investors should keep a close eye on.
Google currently does the same thing that Facebook used to do, which is to run an ad exchange that is undeniably a conflict of interest. The difference is that rather than renting real estate, like Facebook did with iOS, Google is a real estate tycoon. There isn’t a tech company that can kick Google off their turf because Google owns all of the turf – primarily Chrome, Android, Google Search, and YouTube.cBy conflict of interest, I’m referring to AdX, DoubleClick and DV360, collectively known as the Google Network.
Below, you can see Google Network is a $32 billion annual revenue stream. Not exactly peanuts.
To further the lawsuit, a 30-state coalition has issued a third claim that Google uses its monopoly to rip off smaller companies, such as Yelp, DoorDash, and Kayak. You can see evidence of this when Google Search returns flight searches powered by Google at the top, with a large embedded format, rather than producing a fair search result that includes competitors. Yelp has been in a battle with Google over this for over a decade. After Google Reviews were launched, Google pushed Yelp down the page in terms of search results.
The two search engine allegations are fairly straight forward. Most of us who use Google Search can reasonably understand those arguments.
The Messy, Blackbox that is AdExchange (AdX):
DoubleClick was acquired in 2007 for $3.1 billion. As author Tony Yiu points out on Toward Data Science, this was twice the amount paid for YouTube a year earlier. Google Network is a by-product of many acquisitions including AdMob for $750 million and AdMeld for $400 million, among others, yet DoubleClick truly set the supply side dominance in motion as the company owned 60% of the desktop publisher market at the time of acquisition.
DoubleClick allows Google to set a cookie on a website so that online publishers can better target visitors with ads. The DoubleClick cookie provides the time and date a user saw an advertisement, as well as a unique ID that identifies a user by their browser. Publishers are then able to auction inventory to advertisers.
DoubleClick was a major move by Google to expand beyond search advertising. This was the first time Google entered the market on display ads. As stated, DoubleClick owned 60% of the publisher market when it was acquired, which means Google would eventually profit from monetizing millions of websites.
This led to a concentration of power for Google, because with this advantage, it was able to grow quickly as a predominant ad server for publishers. Naturally, Google wanted to maximize this advantage, and so the company made the appropriate acquisitions to operate on the demand side (advertiser side) in addition to the publisher side.
Through a series of acquisitions, Google built DV360, which allows advertisers to use their own data to target customers across publisher inventory. Google always has strong ties to data, in this case powering DV360 with Google Analytics 360. In addition to this, Google’s AdX allows advertisers to create campaigns across Google-owned properties in addition to millions of websites from third-party publishers on the DoubleClick publisher side, as mentioned above.
An easy analogy here would be to compare it to a real estate transaction, since ads are transactional between a buyer and seller. In this case, Google was representing both the buyer and the seller, and in some cases brokered its own real estate to the buyers. You can imagine due to Google’s scale of doing millions of transactions a day, things might get unethical real quick.
Here’s how a Google executive put it:
“[I]s there a deeper issue with us owning the platform, the exchange, and a huge network?” the executive allegedly asked. “The analogy would be if Goldman or Citibank owned the NYSE.”
With that in mind, let’s continue because the depth of Google’s black box is quite deep.
The product AdSense further pools the data provided by publishers. When millions of websites join AdSense to pool data, Google can record more information on a person’s browsing history. It provides a complete view of the consumer for more enhanced targeting. Another area that Google allegedly monopolizes the market is that the company mixes its first party data with this third party data, but only in instances where Google will benefit.
The AdMob acquisition in 2009 provided a similar strategy as DoubleClick but on mobile. It deepened Google’s reach on the supply side for the mobile market. This, of course, was especially advantageous considering Google bought Android in 2005.
You can imagine, that the depth of Google’s data on desktop users and mobile users is deep (and likely quite dark). Meaning, Google knows more about you than you know about yourself. Now, take that depth of data and add the serious conflict of interest that can occur when Google bids against competitors.
Where Google (Allegedly) Went Wrong with AdX
Despite the allegations below that Google was unethical, I want to point out that antitrust could be harder to prove for AdX. This is because many corporations combine first-party publisher data with a third-party ad exchange, such as Amazon, Facebook, Disney and Comcast. Microsoft is building its ad exchange, as well right now, after acquiring Xandr from AT&T. However, Xandr/Microsoft’s strategy is to support the “free and open web” by adopting the Unified ID.
Point being, if the product AdX is found to be anticompetitive, it could have far-reaching implications for other companies. This wasn’t the case with Microsoft, as the company was rather isolated on its throne in the late 90s. With that said, Google is the worst offender in terms of the sheer advantages it has compared to other corporations with large media properties.
Here are some of the more unethical things Google is being accused of:
According to the lawsuit, there was a 65% drop in revenue if publishers chose to not use Google on the demand side. Advertisers are also stating this was a conflict of interest as Google restricted inventory in this case. This would be like a real estate agent refusing to show a house if they did not have both the buyer and the seller to double-end the transaction.
Google also allegedly circumvented waterfall auctions to prioritize their own bids on AdX. Waterfalls were prevalent throughout the ecosystem because they allow exchanges to be ranked by bids. Based on historical bids, if the ad exchange in the number one position doesn’t buy the inventory, it goes to the next ad exchange in the waterfall (the number two position).
Where Google may have manipulated the bidding is by allowing their exchange to meet only floor prices to win the bid, even when another exchange would have bidded higher in a waterfall-like auction. This would be like a real estate agent only presenting their Buyer’s offer to a Seller even if they knew they could get higher offers from another agent.
Due to DoubleClick and AdX waterfalls having the issues described above, programmatic header bidding was introduced to offer true, real-time bidding to increase publisher yield. It essentially increased competition by holding an open auction rather than a closed, blackbox auction that pushes inventory back and forth in an attempt to sell the inventory.
Per Digiday written in 2015: “One notable side effect of header bidding adoption is that it puts pressure on Google’s DoubleClick for Publishers ad server, which, through its dynamic allocation feature, lets AdX — but no other exchange — see and bid on every impression.”
That sentence and general understandingand general understanding of what AdX did to manipulate the waterfall process nicely sums up where Google could face trouble in a courtroom. According to the lawsuit, publishers saw 30% to 40% more revenue through header bidding by simply removing Google’s ability to manipulate the waterfall auction. I bolded “general understanding” because Google is so powerful that the ad ecosystem knew full and well that it was using its monopoly in anticompetitive ways but there was nothing any publisher or advertiser could do about it.
Google has tens of thousands of engineers and is a very advanced company, which is why the allegations are quite complex. The lawsuit points out that Google then later manipulated header bidding by allowing AdX to bid last. As long as AdX beat the previous bids, then it would win the bid. Going back to the real estate agent scenario, this would be like having multiple offers on a house, and the listing agent going to their exclusive buyers to reveal what the prices are to help the buyers win the bidding war.
Google is also accused of using more acquisitions for ad technology that would later be leveraged to subsidize bids. This means Google paid the difference on an advertiser’s bid in order to be the winning bid. In this case, Google simply increased its margin or cut in order to make up for the amount that was subsidized.
Google’s DSP called DV360 was also allegedly engineered to decrease bids from competing ad exchanges, including those who were using header bidding for a more fair auction process. This was done by setting the highest competing bid at the floor price while AdX was able to bid higher.
Google is accused of suppressing header bidding through covert mechanisms by reducing header bids by up to 90%. Meanwhile, Google’s own DV360 bid was not decreased. This was done even when Publishers attempted to set a lower floor for competing ad exchanges, meaning, Publishers were without recourse even if they agreed to a lower bid.
Possible Outcomes
The outcome that many competing supply-side platforms (SSPs) and demand-side platforms (DSPs) are hoping for is the adoption of the Unified Ad ID 2.0 (UID2). There are many investors in The Trade Desk on our site, so this term is likely very familiar to our IOF Members.
The Unified Ad ID is essentially a replacement for cookies that uses email-based identifiers. There are a few hurdles here, such as users would have to opt-in and it brings up privacy issues to have ad exchanges passing a more persistent signal, such as anonymized IDs based on emails. What UID does solve for is any anticompetitive practices as there are many companies in the ecosystem that have signed on to support the open web initiative.
There are more companies than just The Trade Desk that would benefit if this happens – companies like Magnite, PubMatic, Microsoft/Xandr, to name a few.
To be clear, I’m not sure UID2 is realistic because of the privacy hurdles. The ad ecosystem may be “all-in”, but consumers are not likely to opt-in to having a persistent signal.
Another possible outcome is that Google Network is not broken up because what the company did was perhaps unethical but not anticompetitive since many corporations do something similar – which is mix first-party data with third-party data, and otherwise wield their large, corporate publisher dominance.
Instead, there could be regulations that force more transparency in the pricing structure. Or, perhaps Google has to choose a side in the transaction (publisher or advertiser) but cannot serve both.
It’s also possible that Google is not allowed to compete as a Search Engine across other verticals, such as flights, reviews, or dining reservations and must direct the traffic to web pages.
Companies that Challenge the Walled Garden
The ad ecosystem is quite large, although there are only a handful of public companies for us to discuss. Below is a view of the 2023 ecosystem per Publisher Management company Playwire. Most of these companies stand to benefit in some manner should Google be broken up or otherwise made weaker.
As stated, Google Network generated $32.8 billion in 2022. The DOJ is asking for divestiture ‘at minimum’ to divest the Google Ad Manager, including its publisher ad server (DFP) and the ad exchange (AdX).
In addition, the search engine is in the crosshairs for anti-competitive behavior, such as requiring mobile OEMs to make Google the default search engine. When Microsoft did this by requiring Microsoft Explorer to be the default browser across PCs, the behavior was found to be anti-competitive.
We believe the following companies stand to benefit:
Perion Network is partnered with Microsoft Bing. For this reason, the company is considered a beneficiary of Chat-GPT. If Google Search is forced to play fair, it’s likely Bing would see an incremental increase in its market share. In addition to this, Perion does not rely on cookies. As cookies are phased out, ETA around Jan 2024 (assuming no further delays), Perion will stand out in this regard, as well. Perion uses search intent insights to create audiences or “SmartGroups” for targeting purposes. Perion can help any search function, so imagine the search you might perform on Pinterest or Expedia. This is unique because search intent is often a superior signal compared to other forms of behavioral targeting.
The Trade Desk sits on the demand side and is in direct competition with Google’s DSP. If Google has been strongarming publishers into using its exchange for ads, per the allegations noted above, then breaking this up would be an immediate tailwind to The Trade Desk. Essentially, Google is penalizing publishers in various ways if they use another DSP.
If it becomes a more equitable ecosystem, to where publishers are rewarded equally no matter which DSP they use, then The Trade Desk will be able to fairly compete with Google on their publisher inventory. This assumes that Google will be able to keep the supply side ad machine it acquired from DoubleClick for Publishers. Clearly, The Trade Desk has done well in a walled garden environment despite all odds. It’s reasonable to assume The Trade Desk will do better if those walled gardens become weaker.
Notably, as stated above, The Trade Desk has two hurdles – the second one being the elimination of cookies and IDs. This is a separate issue entirely and does not relate to the antitrust case, it just happens to be timed to where the antitrust case is in 2023 and cookies will be phased out in 2024.
The goal is for Unified ID to be accepted as part of the open web, but there are privacy hurdles here that don’t relate to anticompetitive practices. In 2021, 96% of iOS users opted-out of tracking. The same can happen to UID 2.0. In other words, Google could be broken up but this may not do much for allowing the demand-side to access third-party IDs for attribution and measurement.
Magnite and PubMatic compete with Google on the supply side. Publishers have an outsized advantage when they use Google on the publisher side as the company mixes its first party data with third party data to drive the industry’s best targeting. Similar to Meta’s Audience Network covered here, it’s nearly impossible to compete as a SSP when a publisher of Google’s magnitude combines its data and brokers for a pool of publishers.
If this is broken up, then those who specialize on the publisher side — while also not directly competing with publishers — stand to benefit. Because Google is the largest publisher in the world while also competing with smaller publishers for ad inventory, it seems a likely outcome will be the breakup of the SSP side, at the very least.
The hurdle the SSP side must clear is that many corporations do this – with that said, Google is by far the largest offender due to its commanding properties of Android, Chrome, Search and YouTube. It’s also not clear if the other corporations (Comcast, Disney, etc.) have leveraged their position to penalize publishers who use other SSPs.
Ad-Tech Fundamentals
Below, we go into brief overviews of each company’s financials. The goal of combing over these companies during a lull in earnings is to accomplish a few things. First, to acknowledge that this antitrust lawsuit should not be overlooked. The ramifications could be quite advantageous to a few small cap companies. Secondly, to cautiously watch the charts ahead of the trial. We don’t want to front run but we also don’t want to be complacent. Third, is to understand Google a bit more. In the avalanche of Chat-GPT coverage, we want to be realistic about a potential position in Google, and look at the brass tacks of this important lawsuit.
Ultimately, I believe the outcome of the antitrust lawsuit is more important than the hype of the chatbots in the near term – that goes for both Google Search and Bing. AI chatbots are great for early adopters but search engines serve the masses. In addition to this, considering Google Network is worth $32 billion, and we have some small caps that could stand to benefit, we want to be prepared if there is a favorable outcome for the smaller players.
Perion Network
Perion Network is a digital advertising company headquartered in Holon, Israel. The company offers digital solutions in three primary channels of digital advertising: ad search, social media, and display/video/CTV advertising.
Perion helps brands and publishers to identify and reach customers through the company’s proprietary Intelligent HUB (iHub), which processes billions of signals, and powers the cookieless solution SORT. By mixing contextual data with user insights, Perion is able to forego cookies by using this data with AI-based clustering techniques. SORT stands for Smart Optimization of Responsive Traits, which translates to categorizing customers into 1 of 30 Smart Groups through shared traits.
The primary sources of data are contextual – so what a customer is reading at the moment, why they’re reading it, how long they’re reading it and/or what search words brought them to the content. This is combined with signals such as time of day, weather, browser, device, etc. Ultimately, what Perion’s technology does is calculates the similarities between groups, and then to target the group that performs the highest in terms of converting. The model is deemed effective when one group has a significantly higher click-through-rate (CTR).
Second, SORT then optimizes the bids so that it’s a cost-effective solution. SORT analyzes the bid of each publisher and selects the price that is likely to win. If the price is too high, SORT finds another publisher with a similar audience as the SmartGroup. The entire process happens in real-time.
Doron Gerstel, CEO of the company, said in the Q2 2022 earnings call, “iHub sits in the center of the supply and the demand side of the market. This is an innovative model that no one else in the industry has, aggregate data signals from all channels and from both sides of the open web to create the model that eliminates waste and rewards clients. The data goes into Perion’s privacy first cookieless solution known as SORT.”
This is important because cookies are expected to be phased out from Chrome in 2024. Cookies have already been phased out by Mozilla Firefox and Apple Safari.
In addition to this, Perion has partnered with Microsoft Bing. CodeFuel is the Perion product that powers intent-based monetization. When you go to search for something on a search engine, Perion’s CodeFuel can power the search results in an optimal way for conversion. This has led to a strategic partnership between Microsoft and Perion that was renewed in 2020 for four years.
Per the recent earnings call, “If the new Bing search with ChatGPT sparks even modest share gains, Microsoft can do very well in the business. As their CFO, Amy Hood said yesterday, every percentage point of share it gains in search equals roughly $2 billion in additional advertising revenue, and as a strategic partner of Microsoft Bing, I’m sure we will be benefiting from this increase.”I’m sure we will be benefiting from this increase.”
Notably, there is a risk that Microsoft does not renew its partnership next year. However, this risk is muted a bit since Perion was named “Global Supply Partner of the Year” by Microsoft in 2022.
What’s interesting about Perion is that the company is fundamentally one of the strongest ad-tech companies on the public markets due to a strong bottom line and a top line that was more resilient than its peers. Any windfall here could very interesting for a company that already proven operational efficiency with a 20% operating margin while maintaining 30%+ growth in the tough year of 2022. Notably, the top line is decelerating but a catalyst that could lead to a reversal here could be quite interesting
Some of our Members already own this stock so keep an eye out for their posts on the forum, also.
Financials:
The company’s revenue in the recent quarter grew by 33% YoY to $209.7 million. Display advertising revenue grew 24% YoY to $123.8 million and search advertising revenue grew 49% YoY to $85.9 million. The company had an operating margin of 20% compared to 13% in the same period last year.
The company is GAAP profitable, and margins are improving. The net profit margin improved to 18% from 11% in the same period last year. The adjusted EBITDA margin was 23% compared to 18% in the same period last year.
Source: Company IR
The company has free cash flow of $37.90 million representing a free cash flow margin of 18%. Perion had cash and bank deposits of $429.6 million and no debt at the end of December 2022.
Revenue growth is expected to slow, as seen below. The company’s revenue grew above 30% in all four quarters in 2022, and it grew 34% YoY to $640.3 million for the full year of 2022. This is expected to level off quite a bit, presumably due to industry-wide headwinds.
Source: Seeking Alpha
Magnite
Magnite is another ad-tech company that is a potential beneficiary. Magnite is a sell-side platform (SSP) that offers exposure to a higher mix of CTV ads from an independent SSP than what is currently on the market.
We previously discussed Magnite is both an ad server and a Supply Side Platform. Strategically, this allows Magnite to compete with FreeWheel and Google and helps them maintain their position “as the largest independent programmatic CTV marketplace.” The SSP allows for programmatic and private market place bidding while the ad server stores the creatives and serves the ads. The SSP facilitates the selling/bidding (auction) while the ad server actually manages, stores and serves the ads. SpringServe is ad server that Magnite acquired for $31 million. The acquisition came from SpotX’s option to buy.
In their recent earnings call, the management highlighted that Disney has renewed their agreement to use Magnite as Disney’s global programmatic SSP partner. “As you may recall, our relationship with them started with Hulu. We have since grown the relationship to include the full portfolio of Disney properties.”
The company’s Q4 2022 revenue ex-TAC grew by 10% YoY to $156.6 million. The operating margin was (16%) compared to +2% in the same period last year.
Net losses are increasing to ($36.4) million with a net margin of (21%). This compares to $453,000 in net profit for a flat net margin in the year-ago quarter.
The company reported GAAP EPS of ($0.27) compared to GAAP EPS estimates of $0.02. The adjusted EPS also missed at $0.24 versus $0.32 expected.
Our recent analysis discussed that the company missed on the bottom line due to the new CTV ad platform that was launched in February. The newly launched Magnite Streaming is a single supply-side platform that merges the technology from Magnite CTV and SpotX platform. Magnite Streaming led to a $35 million accelerated amortization.
Cash flow was the strongest line item in Magnite’s report. Free cash flow margin was 28% compared to 34% in the year-ago quarter. The company has $326.3 million in cash on the balance sheet with $726.4 million in debt for net debt of $400.1 million.
Below are the analyst’s ex-TAC revenue estimates. Magnite’s revenue is also decelerating.
Source: Seeking Alpha
PubMatic
PubMatic is another sell-side platform that is a potential beneficiary. The company works with over 1,600 publishers. In the recent earnings call, the management highlighted new partnerships with Roku, TiVo, and Kroger.
Rajeev Goel, CEO and co-founder, pointed out that the company has increased its market share from 2-3% at time of IPO in Dec 2020, “We ended 2022 with an estimated market share of 4% to 4.5%, significantly up from when we went public just over two years ago. We are well on our way to our stated goal from the time of our IPO of 20% market share, and we intend to use the downturn to further accelerate our gains.”
The CEO pointed out that Google’s antitrust case could help them achieve the (lofty) 20% goal: “Advertisers and publishers continue to seek alternatives to the walled gardens. This tailwind, along with structural changes, including ongoing antitrust activities, will only expand our total addressable market as an independent technology provider.”
The company’s revenue in the recent quarter declined by (1.7)% YoY to $74.3 million. The operating margin was 22% compared to 37% in the same period last year. The drop in revenue led to lower margins when we compare it to the year-ago quarter. However, the Q4 operating margin was the highest for the year 2022. Net margin was 17% compared to 37% in the same period last year.
The free cash flow in the recent quarter was $7.02 million, with a free cash flow margin of 9% compared to a free cash flow of $18.72 with a free cash flow margin of 25% in the year-ago quarter. The company has cash and marketable securities of $174.4 million with no debt. The analysts expect revenue to decline in the next two quarters. In the earnings call, management was cautious about the macro environment.
Source: Seeking Alpha
The Trade Desk
The Trade Desk is an independent demand side ad platform. We discussed the Universal ID in August 2019. “Strong drivers for The Trade Desk include omnichannel capabilities, which is the ability to buy ads across many channels, such as mobile, video, audio, display, social and native. The universal ad ID is another important differentiation as it offers an anonymized ID that helps track users, target audiences and provide attribution.”
The Trade Desk has benefitted from its omnichannel approach that also focuses on CTV. Jeff Green, CEO and founder of the company, said in the recent earnings call. “CTV continued to be our strongest growth driver as more content owners from around the world are moving beyond ad-free subscription models and offering ad-supported options for viewers.”
Jeff Green mentioned in fourth quarter last year, about 15% of the Trade Desk’s third-party data had UID2 associated with it and expects it to be in the 75% range in the first half of this year. “In fact, I would say again that it becomes about 10x more valuable than with cookies, simply because UID2 solves the needle in the haystack problem that came with cookies, because advertisers can now match their customer data with accuracy across the open Internet more effectively than ever before.”
Jeff Green also sounded confident in the earnings call that the outcome of the DoJ will benefit the company. “I know there is some at Google who tried to suggest that we have been through this three or four times before. I do believe that this is fundamentally different. And part of that is just because of how detailed I think the case is outlined.”
The Trade Desk has illustrated a strong bottom line despite a tough 2022. The company’s Q4 revenue grew by 24% YoY to $491 million. The operating margin was 20% compared to (6%) in the same period last year. The net margin was 15% compared to 2% in the same period last year. The adjusted EBITDA margin was 50% compared to 48% in the same period last year.
The company has free cash flow of $123 million with a free cash flow margin of 25% compared to $151 million compared to a free cash flow margin of 38% in the year-ago quarter. The company had cash and short-term investments of $1.4 billion with no debt.
Below are analyst revenue estimates for the next few quarters. Analysts expect the revenue of the company to grow faster when compared to the other ad-tech companies we covered, and the company also has a premium valuation.
Source: Seeking Alpha
The Trade Desk has a forward P/S ratio of 15.14 compared to 2.53 for PubMatic, 2.47 for Magnite, and 2.22 for Perion Network.
Source: YCharts
The Trade Desk has a forward P/E ratio of 51.12 compared to 38.1 for PubMatic, 17.17 for Magnite, and 13.89 for Perion Network.
Source: YCharts
Conclusion:
Given the sheer impact a weaker Google could have on the ad-tech ecosystem, we wanted to do a deep dive and get in front of this. Most of the names listed are familiar to our Members, yet these names may be seeing the biggest catalyst in their respective company’s history. This will depend on outcome of the antitrust lawsuit and the severity of the DOJ’s actions.
Perhaps the opposite will happen. Perhaps Google’s deep pocketbooks will provide top tier lawyers who can defend the case accordingly. As investors, it’s not our job to take sides but to find where ad dollars may be flowing next.
Ultimately, I believe this is the number one catalyst across ad-tech this year and we want our readers to benefit no matter the outcome. As the market can often do, there may be some price movements ahead of the trial, and if so, we will be watching for entries closely.