This AI Stock Is Poised to Disrupt the Advertising Industry

The Trade Desk (TTD -0.09%) has transformed the advertising industry since it was founded in 2009. The company is the largest, independent, demand-side adtech platform (DSP). It provides a self-service, cloud-based platform that runs ad campaigns and optimizes them to maximize return on investment.

The impact of the company’s innovations is self-evident in its growth. The chart below shows how its revenue has ramped up since its 2016 initial public offering (IPO).

TTD Revenue (TTM) data by YCharts.

As you can see, revenue has grown roughly 10 times in the seven years since the company went public, as Trade Desk has benefited from the shift in advertising from traditional media to digital channels.

Trade Desk’s business model relies on machine-learning models and artificial intelligence (AI) to handle real-time analytics and make predictions that help its customers optimize their campaigns. Earlier this year, the company doubled down on AI with the release of Kokai, its new AI-driven, media-buying platform.

Image source: Getty Images.

What is Kokai?

According to Trade Desk, Kokai uses distributed AI to improve measurements and integrations, and introduces a new intuitive user experience. The new technology is able to use deep learning algorithms that access more than 13 million advertising impressions every second, serving as a copilot for programmatic advertisers.

It’s easy to see why a platform like AI can be so transformative in advertising. The goal of advertising is to achieve the greatest return on investment, converting potential customers while keeping ad spending reasonable. Traditionally, this was done based on demographics with relatively little data. For example, football games typically contain ads for beer and pick-up trucks because the brands selling those products believe that their target customers like to watch football.

With digital advertising, brands are able to get data down to a degree of minutiae that was impossible with linear advertising, as they can track purchase behavior down to the individual as ads contain direct response prompts.

AI makes this form of digital advertising even more powerful. As CEO Jeff Green said on the company’s recent earnings call:

AI has immense promise. It will change the world again. But not everyone talking about AI is delivering something real or impactful. We have been going through every part of our platform and making investments and/or plans to inject AI in the places where data sets are rich, big, and high quality.

He went on to explain that the company is testing deep-learning models in areas like bidding, pricing, value, and ad relevance.

The opportunity for The Trade Desk is enormous

The digital advertising industry is nearing a $1 trillion addressable market, and it should continue to grow as more ad spending shifts to channels like Connected TV, which is rapidly taking market share from linear TV. That transition seems to only be accelerating as a number of major streaming platforms have launched advertising tiers in recent months, and Netflix just said it reached 15 million subscribers to its new ad tier.

Additionally, a majority of advertising campaigns are still handled through insertion orders, or an agreement between an advertiser and publishers to spend a certain amount on ads. Trade Desk’s programmatic approach automates the process and provides more data for advertisers, helping to improve return on investment. Programmatic is also gaining market share on insertion orders.

Meanwhile, Trade Desk has other disruptive initiatives, including Unified ID 2.0 (UID2), a tracking protocol designed to replace third-party cookies, which are expected to be eliminated from Google Chrome by the second half of next year. Trade Desk has signed up many of the biggest advertisers on media platforms, recently adding Warner Bros. Discovery in the third quarter, and Walmart‘s media platform is testing integration with UID2 as well.

As Trade Desk innovates in AI and beyond, and benefits from secular tailwinds in the advertising industry, the company looks poised to continue delivering strong growth and gaining market share in a massive industry. After the post-earnings sell-off, it’s a great time for long-term investors to buy the stock.