This Company Is Set to Take Off as Advertising Goes Digital

There's a revolution happening in the way companies reach their target customers...

Newspaper ads and billboards have fallen out of favor. Instead, companies are opting for online solutions – like banner ads that sit at the top of webpages.

There are a lot of reasons companies are doing this, but the fundamental advantage digital advertising has over traditional advertising is how accurately it targets consumers.

Traditional TV, radio, newspaper, and billboard ads reach everyone, whether they're interested in the product or not.

High-level targeting in the digital age allows advertisers to reach only those consumers who are most likely to respond. This translates to less ad spend and higher sales.

And "ad exchanges" are a growing part of this industry.

The Trade Desk (Nasdaq: TTD) is a software interface that gains access to ad exchanges.

Think of it like E-Trade or Interactive Brokers – software technology that gives you access to stock exchanges and market data.

The Trade Desk serves a similar function, but for ad exchanges and consumer data.

It's an interface for ad buyers to target the right person, at the right time, in the right place, and for the right price.

The real payoff for the future of digital advertising is something called "programmatic ad buying."

To have a successful digital ad campaign today, digital-ad buyers require complex needs that can't be solved solely through human interaction. You have to leverage sophisticated software, like the options The Trade Desk offers.

Here's an example...

You log onto your computer and open your web browser.

You're at your homepage, but you want to check the weather. You type "weather.com" into the Internet browser and hit enter. In the fraction of a second after you've hit enter and before the webpage opens, an auction takes place on an ad exchange.

Advertisers preemptively bid on the ad space (usually banner ads) that load when your webpage opens. The advertisements target you specifically. This is real-time bidding ("RTB"). It's an essential aspect of programmatic advertising.

The advertiser specifies ahead of time how much it's willing to pay for the ad space. The highest bidder gets it.

This only works because advertisers already know a little bit about you, based on "cookies," or small text files saved when you visit a website. (They give advertisers simple information like how often you visit certain websites, how old you might be, where you are in the world, and what products you may be interested in.)

If advertisers did their homework, they can decide what they're willing to pay to put an ad in front of you specifically.

Maybe the ad-buying program identified that you fly-fish in your free time. In this example, let's say there are two potential buyers competing to buy the ad space. One advertiser is a small fly shop nearest to the trout stream in your area. The other advertiser is a company that sells hiking equipment.

When the weather.com webpage opens, you end up seeing a banner ad from the fly shop nearest to the trout stream. Both companies knew you prefer fishing to hiking. And the fly shop was willing to pay more to advertise to you because it was more likely to convert to a sale.

So, instead of spending money to make a product and then selling that product for a profit, The Trade Desk simply provides the technology to connect its customers (ad buyers) with the entities selling what the customers want to buy (ad-space sellers). The Trade Desk gets a fee for its role in making this process more efficient and effective for ad buyers.

For businesses like this, operating margins are the best way to get a clear picture of its profitability.

Over the past two years, The Trade Desk's operating margin has held steady at 22.5%, even while its revenues grew more than 135% from 2016. The Trade Desk's operating margins are nearly double those of the average S&P 500 company.

This is a good indication that The Trade Desk is "capital-efficient." It doesn't need to spend more of its revenue to continue growing.

It has a strong business. And that's translated into astronomical gains for shareholders.

Over the past year, TTD shares have soared, nearly doubling. And it hit a fresh, all-time high in January.

Ad exchanges are a necessary part of digital advertising. And The Trade Desk is the best in the business at connecting users with these exchanges. As digital advertising continues to take off, so should this company's stock.

Sometimes investing is simple.