Market cap: $2.17B Forward P/E: 41 Revenue growth: 78%

​Trade Desk is a technology company which provides a platform for ad buyers. It is mostly used by advertising agencies who purchase invetory (ad space) from various channels. TTD was founded in 2009 by Jeff Green, a veteran entepreneur in the ad tech space. 

Every time you open a website, watch a video, use a mobile app or turn on an internet-connected TV, there is an auction for ads which takes around 1/10th of a second before the content loads. In this short period, advertisers bid various amounts of money to display ads to their targeted audience. Trade Desk is the brain powering this technology and allows advertising companies to allocate their resources more efficiently with clear and measurable results. In other words, it helps them determine how much to bid for individual ad spaces and what audiences to target. Trade Desk provides access to over 4.7 million ad spots every second on average on multiple channels. 

The global advertising industry spent around $650 billion in 2016, with $225.4 billion still spent on TV ads and $205 billion on digital ads. Programmatic advertising amounted to $19 billion out of that and is increasing rapidly. It provides benefits not only to ad agencies, but also to ad publishers (websites, newspapers, TV channels, etc.). In previous years, they had to maintain large sales and administrative teams to market and keep track of their inventory. Trade Desk solves this problem as it efficiently connects buyers and sellers of ads, while saving both time and money. Everybody wins. The company powers advertising campaigns for some of world's most recognized brands across various industries.

The client and employee turnover at TTD have historically been very low, which is a testament to the quality of their product, customers service and corporate governance. Trade Desk has a 4.8/5 rating on Glassdoor, and CEO Jeff Green has a 100% approval rating from employees, a very rare occurence even among popular tech companies. You can find out more about the company's culture and humble beginnings in this article. The company encourages long-term thinking, promotions from within and employees still own a large chunk of the stock.

Revenues have grown to $202 million in 2016, from $44.5 million in 2014. Gross advertising spend on their platform was $1 billion, representing around 5% of the programmatic ad market. Overall ad spending is expected to reach $767 billion in 2020, or a 4.2% CAGR. Digital spending should reach $340 billion in 4 years, or a 13.4% CAGR. Programmatic is expected to be the dominant method for digital advertisers in a few years.

Unlike many tech companies today, Trade Desk has been profitable on an operating basis for years, and earns excellent returns on capital despite high R&D and marketing spending to capture market share. Revenue increased 78% in the first quarter of 2017, while operating income declined 43% due to high investments in infrastructure and platform development. Their G&A expenses for the quarter included a charge of $3.3 million for "bad debt expense" related to two customers. This expense should be non-recurring and I expect higher operating income in future quarters. The company has to pay inventory providers before it receives money from advertising agencies, resulting in a DSO of 82 days (2016). They have been working hard to reduce this payment gap and receivables have decreased by c. 17% since December 2016.

The company filed for a secondary offering in May 2017, which was non-dilutive and during which several controlling shareholders reduced their stakes . CEO Jeff Green did not sell out and he still holds 44% of voting power, and other executive officers also maintain sizable stakes. I love investing in a business where management has significant "skin in the game". It makes them focus on the long-term, instead of pleasing Wall Street and trying to beat every quarter. Jeff Green is an excellent leader, and he sees further potential for their platform especially in Asia and emerging markets. 

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UBNT popped up on my one of my screens last week so I decided to take a look at it. The company develops networking technology for service providers and enterprise customers. Their business model is a bit unique, as they sell directly online to distributors, which means lower SG&A expenses and little capital needed to operate the business. This translates into high operating margins and high ROIC. ​ It was founded by Robert J. Pera who still holds over 70% of stock. The interesting thing is, that he receives no salary or compensation as a CEO, so his only earnings come from selling stock as UBNT pays no dividends.

It sounds like a good story, but there are issues with operating cash flow and inventories. Revenue was up 23% in the last quarter and 30% over the past 6 months. The company expects $1-1.15 bil. in revenue for the year ending June 2018 or 27% growth over 2017. This looks promising but receivables are growing much faster, which suggests aggressive revenue recognition.
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Below is the latest balance sheet. Receivables are up 67% and vendor deposits increased almost 80%. I was not able to find a description of what vendor deposits actually are. Managements sometimes create obscure items in the balance to hide a deteriorating condition of the business. Days sales outstanding (DSO) have increased to 58 days in 2017 from 40 days in 2015, another huge red flag. Inventories increased 150%, way out of line with current revenue growth and expected expansion in 2018. Days inventories on hand (DIH) are up to 142 from 41 in 2015, a huge increase.

All these balance sheet items have a negative impact on operating cash flow, which has now slipped below net income, a significant red flag. There is a growing divergence between these two metrics, which suggests earnings manipulation. If you buy inventory and later don't sell it, or you recognize sales but don't collect receivables, you are overstating income. 
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Source: ​https://stockrow.com/share/6487acd1916bee45148b6970c56f616d
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I like their growth and ROIC numbers, also the fact that CEO owns such a sizable stake in the business. But the rapid increases in receivables and inventories might be a problem few quarters from now. I am not going to short the company, but I will certainly not buy their stock at this moment.

ANET reported excellent results yesterday after market close. Revenue was up 51% while operating income more than doubled to $116 million, all customer segments recorded doube-digit growth. New products launched last year now represent around 30% of sales, incredible achievement. And according to the CEO, the upgrade cycle for 100-gig switches is just beginning:

" First of all, I think we are in very early stages of 100-gig upgrade cycles in general. 40-gig was a window of opportunity, mostly in the enterprises, but almost every major cloud is going to 100-gig spine. Right? And I think that cycle started for us with especially the R Series. There's a little bit of it in the E, but it really started in 2016 and I believe it's a five-year cycle."

The company's market share is around 14-15% at this point, they still could possibly double it or more. In addition they are getting more visible in other markets like routing and data analysis which will start contributing in the next few quarters.

I have been long ANET since September 2016 and do not plan to sell anytime soon. Their P/E ratio has climbed above 56, which is really nosebleed territory, but then revenues and income are growing this fast, it might be justified. Jayshree Ullal, Andy Bechtolsheim and Kenneth Duda are executing flawlessly and they have exceeded all my expectations. Cisco is trying hard to stop Arista, but the company is just firing on all cylinders. There is really no reason to sell these shares at this point, I think their revenues and cash flows will be much higher 3-5 years from now so I keep holding.