Let's talk about digital advertising and specifically some stocks that you might be interested in as a potential investment hashtag not personalized Financial Advice of course, but as a potential investment, a lot of folks come to me and say Kevin what do you think about Disney What do you think about Netflix And one of the concerns that I have is both Netflix and Disney have an extremely expensive cap X structure for creating new content. They spend a lot of money on building Studios and producing content, and their goal is that they can subsidize some of that content with advertising. However, according to Netflix's own earnings call, they're not seeing the kind of adoption for ad supported Netflix streaming as they had hoped. and this, in my opinion, makes me much more interested.

and rather than potentially investing in the quote-unquote gold of Digital streaming, it makes me much more interested in actually investing in advertising companies that might be benefiting regardless of whether we're heading into a recession or we're heading into this sort of Uncertain future for how we're going to monetize Digital streaming. after all, we know a lot of companies have told us we are running into a lot of potential risk when it comes to advertising American Express and their earnings call told us that businesses are spending less money on Advertising Google Told us that advertising demand is flat to negative for YouTube it's straight up and negative for the last two years. When you look at Meta, you have warnings on Advertising When you look at Amazon you have warnings on Advertising Advertising across the board seems to be a risky Venture right now and it makes sense. I Mean we could look at some reports to see just that.

Add budgets. Here's a report that suggests ad budgets are set to slow even more in 2023. I Believe this was a Forbes report here. Lower ad budgets in 2022 affected nearly every ad stock, including companies like Alphabet and Meta.

And what's happening here in this next year going forward, well look at some of the ad spending: First China according to Insider Intelligence will weigh heavily on the 2023 numbers as the second biggest digital ad Market is expected to quote post its lowest digital ad growth on record due to tougher regulations and economic headwinds. U.S The U.S advertising Market is expected to grow by about 5.9 percent in aggregate in 2023, and that's lower than the nine percent we saw in 2022. However, look at this on a brighter note. The article says the connected TV Market is expected to grow 14.4 in 2023 and will grow faster than the overall advertising Market Linear TV in exchange is expected to fall by 6.3 percent and 2023 according to uh, this individual from Pro Well, okay.

well I mean this person. it might be a little biased. he's a Director of programming. CTV Supply at Xander 2023 marks the new age of CTV.

Yeah, whatever. Okay, that's way too biased for me to really even have read that. But anyway, the point is, we know that. the ad sector is slowing growth substantially.

We know that expenses at Disney and Netflix are through the roof for investments into advertising. So potentially, where does it make sense to invest? Well, Arc Invest is a big fan of investing in Roku I Personally have some qualms about investing in Roku and I'll show you specifically why. So first of all, this this is the last earning statement from Roku And what you could see is that first of all, they're massively negative on their device's revenue. We know that they don't actually make money from their devices.

That's fine. But what we do notice is that you actually have seen margins that Roku compress 500 basis points year over year for the fourth quarter. And so now it's sort of like, oh, dang, like where you invest in the advertising sector, right? It's tough. You've actually grown platform advertising Revenue by four percent at Roku.

Now that's great. Fantastic. Revenue has grown by four percent at Roku. But for a company that's losing money, that's potentially not the greatest thing.

that we want to be. hearing that revenue is only growing at four percent at Roku, it's trading like a growth stock. yet it's not really growing that much. It's growing by about four percent.

Not only is it growing by about four percent uh, year over year here, but you're seeing that margin compression and an explosion in sales and marketing if you look at the sales and marketing. line, You'll see 297 million dollars spent on sales and marketing. 297 is an explosion of 82 percent. They spend 82 percent more money on sales and marketing to grow revenues by four percent.

That's insane according to Bloomberg Revenues for Roku are expected to remain negative through 2026.. So you have an infinite P E ratio for this company. Not only that, if we look at their current assets, you're sitting it. You're decent.

You're sitting decently at cash and cash equivalents of about two billion dollars. They've got about 1.1 in current liabilities. So you've got maybe about 800 million dollars of rough free cash. But the price problem is, for the year ended 2022, this company had negative free cash flow Roku had negative free cash flow of 172 million dollars.

So yeah, you've got a little bit of a run rate, right? You've got maybe three four years at this burn rate of negative. Uh, free cash flow? You've got the extra cash there at Roku. But you're paying a pretty high evaluation for a company that's not growing well at all. Four percent increase in top line revenue while spending 82 percent more on sales and marketing.

Kind of wild in my opinion. Now that's just looking straight at the shareholder letter. You could also look uh at some other sources uh, and and see basically the same thing being said, but a little bit differently here. for example.

and I Know some people don't like it, but this is why I Like going to the sources myself, but here for example is Motley Fool and their opinion and they usually are bullish. it seem games on a lot of things, but not on. Roku Look at what they had to say. Roku's audience is still expanding, but its margins are crumbling.

Its gross margins. Gross margins. That's different from the margins that I talked about because I specifically talked about streaming margins where you get a 500 basis point fall year over year. This is their gross margins combined falling about 190 to over 40 to 42 in the fourth quarter.

We're looking at again, a slightly different margins here. Uh, the gross margin of its platform business which generates most of its revenues from the integrated ads on Roku fell fell from 60.6 to 55.8 percent thanks to Macro. and then of course their set-top boxes. margins also fell.

And so this sort of begs the question. where is Kevin liking the advertising business? Well, many of you already know this and maybe you've already said it out loud To me, it's obvious it's Trade Desk. I've personally been a big fan of investing in Trade Desk. This is their Q3 report.

Let me grab their Q4 report which is right here year and take a look at why. I Like Trade Desk, So Trade Desk grew its sales and marketing expenses by 28. So Trade Desk grew sales and marketing by 28. year over year and their year-over-year growth was 24.

So rather than growing Revenue four percent rev at Roku and spending 80 something percent more on marketing, they grew revenues 24 year over year while only spending 28 percent more on sales marketing. they also had that drop off on a stock based comp for their GNA. So you had a larger net income this quarter, but you actually have growth now that growth is slowing. Don't get me wrong, it is a slowing sector, right? You had growth that slowed from 31.8 year over year to in the last quarter, just 24 growth.

So growth is slowing. It is that recessionary pain that you are seeing, but you actually have a cash flowing business. Not only is it cash flowing, but the company is performing substantial BuyBacks Because they've got plenty of money to cover their payables and any of the extra cash that they have along with their free cash flow of 475 million dollars for last year, they are performing stock BuyBacks which is great. So here's a company in my opinion that if you're looking for something in the advertising space that is basically connected TV Advertising Trade Desk is the one that has all the pricing power.

Now think a little bit more about about 10. Connect to TV For a moment. Connected TV is nice because you're not facing the Anti-Trust competition that maybe Google or Facebook are experiencing. Connected TV is actually driven by a new form of cookie and this new form of cookie is called Uid2.

Now, what's brilliant about Uid2 is it was actually created by Trade Disk and I Want to be clear? Okay, maybe I'm slightly biased I'm an investor in Trade Desk Okay, but I want to explain why People always ask me why and why aren't you investing in Netflix or Disney or Roku Here's why Uid 2 was created by Trade Desk, but they purposefully made it open source in my opinion because they're playing 4D Chess With The Regulators They don't want the Google problems Where people, you know we've got these Anti-Trust concerns for Google leading to a disaster with Uh with with potential Google advertising in their basic Uh advertising Monopoly right? Uh, And then that's because they have like 90 percent sales side control of the cell. The the inventory for advertising, but Uid too is is basically different from third-party cookies, but it's somewhat similar in that basically users provide consent to a publisher by sharing their email address and then a unique ID is created with that email address. Google has one that uses its. uh, that's sort of a new cookie that uses your phone number or your login.

ID when you're logged in with Google to kind of track you around, but with Uid2 it's sort of the competitor to Google's versions. Uid2, you're using email addresses to create unique and encrypted IDs to make sure that your data remains private. But as long as Trade Desk or some of these connected TV platforms can capture about 10 to 15 percent of users, they can anonymously model data much better than the old cookie system. and the starting to use AI to help model the data and make sure that people are placing their ads with the highest Roi And that's where you're seeing declines in linear TV advertising.

There's no doubt that linear TV is going over to connect to TV. Then it's just a matter of who's winning and Tradesk so far is one of the big Winners. They have something called the KOA AI. You could learn more about that, but basically it's really good at using AI to find your best customers via look-alike modeling and trying to take the data that they do capture.

They use Uid2 to do this. They learn a lot more with Uid2. The estimates are that the Trade Desk framework it could basically increase Roi or Cpms by about 116 percent compared to some of the older forms of cookies. And really, the fact that Ouid 2 is open source and it's essentially a self-regulated platform limits you from Anti-Trust Complaints: You know a lot of other people like Kevin Why aren't you investing in Google It's like, well, you're investing in Google for advertising, but advertising is plummeting at Google You could try to go for the hype of oh well, it's sold off maybe by the dip on Google because they do have ai but you know other companies have Ai too and are actually making money and and and are growing.

And this to me is is hands down Trade Desk. So look yeah, am I biased because I'm an investor in it of course. But I'm also defending my position as to why why I invest in Trade Desks now I'll give you a quick uh valuation on Trade Desk Uh, just really, we'll do a quick little PEG ratio here and then I've got to go to the course member live stream I'm trying to get that course member livestream started a little bit earlier, uh, regularly here. but but I I Keep talking too much on this stream.

Uh, so we are looking for at the end of 2023 to be looking at about a one dollar EPS Which does mean that it's about a buck five. Which does mean that right now at 55 bucks, trade Desk is trading a little Rich At 52.3 times, they are expected to grow at about 30 to 35 percent. Let's go conservative and take 52 divided by 30. it puts you about up 1.73 times PEG ratio for Trade Desk.

but that's my thesis on Trade Desk. A lot of people have been asking about it and uh I figured I'd uh I'd add some of my opinion on that. so uh, but yeah otherwise otherwise I'm not a big fan of the uh of the um uh the the advertising space. This is really the only player I find interesting and uh there you have it.

Thank you so much for watching! Appreciate you coming to another meet Kevin report Hopping straight over to the course member live stream now thank you so much! Goodbye.