Better Buy: Alphabet vs The Trade Desk

These two tech stocks have both been big winners in the past.

A hand holding a graph trending up, indicating a surging share price on the ASX

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Alphabet Inc's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google and Trade Desk Inc (NASDAQ: TTD) are both in the digital ad business, an industry that is expanding rapidly as marketers move toward digital channels and measurable, data-driven campaigns. Over the last three years, both companies have outperformed the broader market, though The Trade Desk has surged more than 1,700%, while Alphabet is up just 84%. But which of these growth stocks is the better buy today?

Alphabet: The search giant

Alphabet's Google has more than 90% search engine market share, ranking the company nearly 89 percentage points ahead of second-place Bing.

That nearly inconceivable level of success is something few companies ever achieve, but it's just the tip of the iceberg for Alphabet. The company also owns the rights to Android, YouTube, and Chrome, all of which are market leaders in their own categories. This incredible network of content platforms has allowed Google to collect troves of consumer data – the kind of data that's valuable to marketers.

Not surprisingly, Google's many content platforms have allowed the company to claim the top spot in the US digital ad market, though investors should note that the company has lost significant ground recently. Even so, Google's advertising business continues to generate mountains of cash – $147 billion in the past year. And that figure represents more than 80%  of the company's total sales.

But Alphabet's not done yet. Google Cloud Platform (GCP) ranks third globally among public cloud service providers. And the company's reenergized, partner-based growth strategy has made Google Cloud the fastest-growing part of Alphabet's business. In 2019, partners like Deloitte and Globant brought 85% more new customers to the platform than in 2018, and revenue attributable to partners jumped 195%. While this segment represents only a fraction of Alphabet's top line, if the strong growth continues, this could be another big revenue stream for the company.

As a final note, investors should be aware that Alphabet is facing litigation. The US Department of Justice has sued the company for "anticompetitive tactics to maintain and extend its monopolies in search and advertising". And it's entirely possible that this lawsuit will hurt Google's ad business, putting the company's primary source of revenue in jeopardy.

The Trade Desk: The content-neutral platform

The Trade Desk primarily earns revenue through its AI-powered demand-side platform (DSP), which allows marketers to plan, launch, and optimise digital ad campaigns. The company also generates revenue by providing clients with data captured by its platform; this second-party data is used alongside the client's first-party data to improve ad targeting and, as a result, operational efficiency.

The Trade Desk differentiates itself through its content-neutral strategy, meaning the company doesn't own content platforms like YouTube or Google Search. Additionally, The Trade Desk only works on the buy-side of ad transactions, which eliminates the conflicts of interest and transparency concerns that come with Google's presence on both the buy-side and sell-side.

According to Gartner, both The Trade Desk and Google are leaders in the ad tech market, though The Trade Desk outranks Google in campaign setup, management, and results analysis. These performance advantages, paired with The Trade Desk's content-neutrality, have helped the company grow its client base quickly while keeping churn (client turnover) below 5%. That combination has powered exceptional growth in revenue and free cash flow.

Metric

2017

Q3 2020

Change

The Trade Desk revenue

$308.2 million

$732.1 million

138%

The Trade Desk free cash flow

$18.2 million

$132.3 million

629%

Alphabet revenue

$110.9 billion

$171.7 billion

55%

Alphabet free cash flow

$23.9 billion

$34.0 billion

42%

Data source: The Trade Desk and Alphabet SEC Filings.

Going forward, The Trade Desk is betting heavily on connected TV (CTV). The company has expanded access to CTV inventory through integrations with supply-side partners, and CEO Jeff Green believes that premium video will eventually represent about 50% of global ad spend. For reference, eMarketer estimates that ad spend in 2020 hit $615 billion. That's a big market opportunity.

The verdict

In the coming years, Alphabet's market share in the digital ad space may continue to fall as competition intensifies with Amazon and The Trade Desk. Moreover, the looming legal consequences raise questions about the company's future in the ad market. So Alphabet's other businesses will have to pick up the slack. But Google Cloud Platform faces intense competition from the likes of Amazon and Microsoft, and Google hardware (Google Nest, Pixelbooks, Pixel phones) doesn't have the same mass appeal as products from Apple and Samsung.

By comparison, The Trade Desk is much smaller, and it's growing more quickly. During the most recent earnings call, Green told investors that the company gained significant market share in fiscal 2020. Moreover, the company's content-neutral strategy promotes transparency, which helps separate it from walled gardens like Google. These advantages give The Trade Desk more long-term potential in my opinion and should help the company continue to outpace Alphabet in the future.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine owns shares of The Trade Desk. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Microsoft and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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