IPO Preview: The Trade Desk

The Trade Desk Inc. (Pending:TTD) expects to raise $79 million in its upcoming IPO. Based in Ventura, California, The Trade Desk is a technology platform for ad buyers.

The Trade Desk will offer 4.67 million shares at an expected price range of $16 to $18.

TTD filed for the IPO on August 22, 2016.

Lead Underwriters: Citigroup Global Markets, Jefferies LLC, and RBC Capital Markets

Underwriters: Needham & Co., and Raymond James & Associates

Business Summary: Company that Provides Technology Platform for Ad Buyers

As described in its SEC Filings, The Trade Desk, Inc. enables ad buyers to purchase and manage data-driven digital advertising campaigns. The Trade Desk uses a self-serve platform and relies on its own teams in the United States, Europe, Asia, and Australia.

The Trade Desk's platform allows clients to manage campaigns in an array of formats, including display, video and social, and on a multitude of devices, including computers, mobile devices and connected TV.

The company has plans to expand into Audio (now in a beta version).

Media buyers can run campaigns through the Trade Desk platform through every online media channel and create reports regarding customer influence.

(Example of cross-device use from thetradedesk.com/products)

When a consumer lands on a webpage, watches a video or Internet-connected TV, or uses a mobile application, this sets in motion a programmatic bidding auction for advertising inventory. Auctions are often as quick as one tenth of a second. The Trade Desk's platform gives its clients the capability to compete in that marketplace.

In 2015, ad buyers spent nearly $639 billion on global advertising, and close to $14.2 billion occurred through programmatic ad spot marketing.

Financial Highlights & Use of IPO Proceeds

The Trade Desk provided the following figures from its financial documents for the years ended December 31:

In addition to this 156% increase in revenue and a tripling of net income 2014-2015, for the six months ended June 30th, TTD reported revenues of $42,410,000 in 2015 and $77,560,000, along with respective net income of $5,674,000 in 2015 and $6,558,000 in 2016.

Management describes how TTD's impressive growth is largely due to increased share of spend by the firm's existing clients. TTD believes that further opportunity exists among its current batch of clients to grow revenue. This depends on TTD being able to maintain excellent relations with its current client base.

(Source: SEC Filings)

Financing of TTD's expansion has largely come through sales of convertible preferred stock, taking on debt ($56,623,000 long-term debt, net of current portion as of June 30, 2016), and cash from operations. TTD currently runs a deficit of ($28,290,000).

According to management, as of June 30, 2016, the firm had $37.6 million in cash and net working capital of $105.4 million. They believe that this existing cash + net IPO proceeds + remaining portion of credit facility will cover TTD's working capital requirements for >12 mos.

Overall, The Trade Desk intends to use the net proceeds of this IPO for general corporate purposes, working capital, and funding and expanding their business and marketing programs. In addition, the company will pay a $750,000 fee to a lender after paying off a line of credit.

Executive Management Overview

As described in the firm's SEC Filings, CEO Jeff Green co-founded The Trade Desk and has served as its CEO since November 2011. His previous experience includes positions at AdECN, Experclick, eBound Strategies, and 411 Web.com.

CFO Paul Ross has held his position since 2014. He has previously held positions at Genmark Diagnostics, Teledata Technology Solutions, Meade Instrument Solutions, PowerOne Incorporated, British Petroleum, and BP Arco. Mr. Ross holds an undergraduate degree from the University of California at Los Angeles, and he earned his MBA at the University of Southern California.

Potential Competition: Google, Amazon, Microsoft Media Network and Others

The Trade Desk faces competition from large enterprises such as Google (Nasdaq:GOOG) (Nasdaq:GOOGL) (DoubleClick Ad Exchange) and Amazon (Nasadq:AMZN), as well as smaller companies that offer ad buying technology. These include Microsoft (Nasdaq:MSFT) Media Network, Marketplace by Adtech, OpenX, AppNexus, AdMob, NativeX, AirPush, and others.

Assuming an initial share price of $15 and earnings as of year-end 2015, TTD's P/E ratio of 38 falls well below that of Amazon (193.7), and just slightly above those of GOOGL (30.9) and MSFT (27.3).

Conclusion: Consider A Modest Allocation

TTD stands out for its very significant growth and profitability, as well as loyal customer base. Between 2014 and 2015, TTD had greater than 95% client retention. While some suggest that clients could tighten their fees, following publication of the firm's profitability, TTD still holds strong potential to expand and compete with larger rivals.

The company has solid working capital; while they do run a deficit, the situation for repayment of long-term debt is promising. As of March 30, 2016, TTD disclosed that it had paid off all remaining principal and interest due under a previous 2015 credit facility, showing a solid track record. Consistent cash holdings keep us optimistic that this pattern could continue into the future. TTD does not have to repay its new long-term obligation until 2018.

We expect TTD to perform well post IPO and recommend investors consider a modest allocation. Tech IPOs could be highly popular this fall with a crowd of companies waiting in the wings.