The Trade Desk trades up

Contact: Scott Denne

The first successful ad-tech IPO in two years made a strong debut on Wall Street today. But don’t expect the floodgates to open for ad-tech offerings anytime soon. The Trade Desk priced at $18 per share and began trading at $28 for a market cap north of $1bn, or 7.2x trailing revenue. Within ad-tech, there aren’t many companies that offer investors the scale, growth and potential sustainability to draw such interest.

Trade Desk deployed a different sales strategy than most of its media-buying software peers. Vendors in that space were forced to choose between scaling up quickly through short-term, low-margin deals with ad agencies or fighting those agencies for direct business with marketers. Trade Desk positioned itself as a software provider to agencies only, and therefore not a threat to its own customers. Its positioning and product led revenue to grow 2.5x last year to $114m. Through the first half of this year, it’s running at $149m trailing revenue. It’s not the largest of its peers, but does have the highest growth at that scale.

Trade Desk’s debut is good news for AppNexus, which has been working toward an IPO of its own for the past year or so. However, most ad-tech vendors with the kind of growth that Trade Desk generates are simply too small to consider a public offering. And those that have the size don’t have the growth.

Today’s offering is reminiscent of Rocket Fuel’s 2013 IPO. That company also went public on the strength of scorching growth derived from sales to the agencies. Rocket Fuel currently trades down 95% from its debut. One of its problems was that it was winning high-margin sales from agencies. Once it went public and those margins became known, its customers began to demand that it take lower margins, which hindered its growth. While that’s a risk for Trade Desk, it’s far less pronounced.

Rocket Fuel was keeping about 55% of the media spending running through its platform, while Trade Desk keeps 21%. Trade Desk targets a different part of the agency business. As its name suggests, Trade Desk sells to agency trading desks – sophisticated digital media buying operations – many of which have a contractual relationship with the company. At the time of its IPO, Rocket Fuel was catering to agency buyers on a one-time basis and before most agencies’ holding companies sought to consolidate digital spending via their trade desks.

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