The Trade Desk (TTD) is a technology company that empowers buyers of advertising. It operates under a thriving SaaS business model with mid double-digit growth and 30%+ operating margins, in an industry with expanding $700 million TAM. The company is the only addition to our market-beating portfolio in 2018. Readers can familiarize themselves with our original long thesis here.

In this piece, we first update our valuation model following Q4 2017 results and 2018 guidance. We then introduce and analyze the main competitors in the DSP industry, and close by reiterating our long thesis in light of the findings.

2017 results and 2018 guidance

For Q4 2017, the company reported revenues and adjusted EBITDA numbers above guidance. For Q1 2018, it guided to revenues of $73 million (+38% YoY) and adjusted EBITDA of $7.5 million (+20% YoY). And for full year 2018, to revenues of at least $403 million (+31% YoY) and adjusted EBITDA of $117 million (+23% YoY).

Implicit in the guidance is full year EBITDA margin of 29%, a 200 bsp compression relative to 2017. Most of it is due to the company investing aggressively in future growth. A smaller contribution may come from lower take rates in Connected TV. “It is land grab time in advertising”, repeated CEO Jeff Green during the earnings conference call. And his actions back up his words, as evidenced by a strong hike in T&D (technology and development) expenses in Q4 2017, up 29% sequentially and 77% over the same quarter last year.

Plugging 2017 reported results into our model, we estimate full-year after-tax earnings of $82.2 million, or $1.86 per share, using 44.5 million diluted shares. We arrive at this figures after a number of adjustments, including subtracting SBC and adjusting for growth, and we believe they represent current earnings power better than both GAAP and management-adjusted figures. For detail on the adjustments, refer to our original piece on the company.

Per-share 2017 earnings power of $1.86 are 3.3% above our expectation for $1.80 coming into earnings.

With a discount rate of 8%, EPV (Earnings Power Value, or the value of current earnings if the company decided to stop investing in growth) comes at $82.8/0.08 = $1,035 million, or $23.3/share. Adding net excess cash of about $120 million brings the value of equity to $1,155 million, or $26.0/share.