Top analyst on concerns over the Trade Desk's dwindling clients

Key Concepts:

• Walmart Connect partnership
• Price target and valuation
• Amazon as a competitor (DSP, CPG)
• Demand-side platform (DSP) - Trade Desk
• Margin improvement and AI implementation
• Sales focus and execution
• Management changes
• KOSAI operating system

Valuation and Price Target:

• Oppenheimer maintains an outperform rating on Trade Desk with a price target of $70.
• The price target was cut following a 30% drop in the stock price after earnings.
• The $70 price target represents approximately 25-26 times next year's cash flow, which is considered a rich valuation.
• Trade Desk's current valuation is around 11 times, while other companies like the "darling of the sector" are trading at 26 times and Roku at 21 times. Meta is at 15.
• The analyst believes the stock is more likely to recover to over $20 after the next quarter.

Amazon as a Competitor:

• The digital media space is vast, with competitors including Meta and Google.
• The key question is whether Amazon's Demand-Side Platform (DSP) is a direct competitor to Trade Desk.
• Amazon poses a risk in certain categories, particularly CPG (Consumer Packaged Goods), which accounts for approximately 15% of Trade Desk's business (assuming CPG is half of the 30% from auto and CPG).
• Amazon has strong data on CPG consumer purchases, giving them an advantage in that area.
• However, Amazon lacks strong data in other sectors like auto, financials, telecom, and travel.
• The analyst believes the risk from Amazon is not significant overall.
• Using multiple DSPs is inefficient, suggesting advertisers should stick to one platform like Trade Desk.

Trade Desk's Challenges and Opportunities:

• The recent quarter was not a disaster, but the guidance may have scared investors.
• Implementing AI and improving margins could make Trade Desk more attractive again.
• The primary focus should be on sales execution, as the company is experiencing a deceleration in growth (5.5% deceleration in Q2, with further deceleration expected).
• Recent management changes, including a new CFO and the departure of the head of sales, contribute to execution challenges.
• The company is not executing at peak levels, which is partly self-inflicted.
• Progress with the new operating system, KOSAI, is crucial.
• KOSAI is expected to generate 20% better revenue and improve performance for advertisers.

Walmart Connect Partnership:

• The timing of the Walmart news may be related to negotiations on rates and fees.
• Walmart may be seeking to pay less for Trade Desk's services.
• The analyst believes Trade Desk currently offers the best solution for brand performance in the market.

Key Quotes:

• "We did our price target 70 now which would still be like 2526 times next year's cash flow. So still rich."
• "...not executing at peak levels, we think a good amount of this is self-inflicted."
• "...I don't think anyone has a better mousetrap in the market right now for brand performance."

Technical Terms:

• DSP (Demand-Side Platform): A technology platform that allows advertisers to programmatically buy digital advertising.
• CPG (Consumer Packaged Goods): Products that are consumed frequently and replaced regularly, such as food, beverages, and household items.
• KOSAI: Trade Desk's new operating system designed to improve revenue and advertiser performance.

Synthesis/Conclusion:

Despite recent challenges, including a stock price drop, decelerating growth, and management changes, the analyst maintains a positive outlook on Trade Desk. The company faces competition from Amazon in specific categories like CPG, but its overall market position remains strong. Successful implementation of the KOSAI operating system and improved sales execution are crucial for Trade Desk to regain investor confidence and achieve its growth potential. The Walmart Connect partnership remains valuable, although potential negotiations on rates and fees may be ongoing.