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The Trade Desk Still Looks Like A Winner After Post-Earnings Rally

Published 16/08/2022, 15:54
Updated 09/07/2023, 11:31
  • TTD gained 36% after a strong second-quarter earnings report
  • TTD seems to be firing on all cylinders
  • As always, risks remain, including valuation and a still-uncertain online ad environment

Between November and July, stock in The Trade Desk (NASDAQ:TTD) plunged more than 60%. There were a number of reasons for the decline.

The Trade Desk Weekly Chart

Source: Investing.com

Broad market considerations certainly played a role. Growth stocks of all stripes lost their momentum, and TTD wasn’t immune.

Online advertising stocks sold off, too. As one of the biggest independent players in the space, The Trade Desk was buffeted by not just macro headwinds but sector pressures. Fears of a recession suggested sharply lower growth for the industry.

Given that The Trade Desk generates its revenue by taking a portion of client spend that runs through its buy-side platform, the company’s earnings seemed at risk. And with both Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) focusing on user privacy, the worst-case scenario was that a macro slowdown would be exacerbated by lower pricing, as clients paid less for less directly targeted ads.

Even valuation was a potential concern. At the highs, TTD traded for 125x 2021 earnings per share. As valuation became more of a focus in 2022, investors weren’t quite as willing to pay that kind of multiple — even for quality.

But what didn’t hurt TTD stock was the company’s actual performance. In fact, it was a blowout third quarter 2021 report that sent the stock to the November highs.

Another blowout quarter has sent TTD stock soaring once again. And as long as the external environment cooperates, the rally can continue.

The Case For TTD Stock After Earnings

Taking the broad view, and ignoring macro issues and other short-term factors, the case for The Trade Desk stock is that it’s one of the best growth stories in the market.

Online advertising penetration is only going to grow over time. Google, Facebook (NASDAQ:META) and other so-called “walled gardens” — platforms that control their data and ad inventory — are facing regulatory pressure. In the open internet, The Trade Desk continues to take share of a market growing thanks to trends like Connected TV.

What’s so positive about the Q2 release is that it seems to support that case in its entirety. Peers have seen revenue growth slow down — but The Trade Desk revenue increased 35%, on top of a 101% rise the year before. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins stayed healthy at 37%, the best figure in the industry.

On the second-quarter conference call, chief executive officer Jeff Green called out the tailwind from Connected TV, saying it was “evolving faster than anyone predicted.”

With Disney (NYSE:DIS) — now a Trade Desk partner — and Netflix (NASDAQ:NFLX) both rolling out ad-supported options, the amount of inventory and potential revenue is set to grow exponentially going forward.

And as Green noted, no company in Connected TV has the heft of Google, in particular. And so no company will have the power that Google does. In other words, as well as The Trade Desk is doing in traditional online advertising, it has the potential to do far better in Connected TV.

What Goes Wrong

And so the optimism toward TTD after earnings isn’t a surprise. The report clearly refocused investors on the quality of the business rather than the swirling winds around it.

The question is if that focus will hold. After the jump, TTD admittedly isn’t cheap. Shares trade at 75x trailing 12-month earnings — and even that multiple doesn’t tell the whole story. The Trade Desk issues a significant amount of stock to employees; it’s booked $490 million in stock-based compensation over the past four quarters.

Incredibly, that’s about 35% of revenue over that period. To be fair, over half the expense comes from a one-time grant of stock to Green. But that aside, about 30% of TTM adjusted after-tax earnings come from the exclusion of stock-based comp. Adjust for that fact, and the stock is trading at over 100x earnings.

Taking the long-term view, TTD is probably worth that kind of multiple. The story here is as impressive as any in the market, and the company is only at the beginning of its growth.

But as the last few months show, investors don’t always take the long-term view. Investors should expect upside in TTD over time, but there may be some bumps along the way.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.

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