The Trade Desk (TTD -4.34%) stock has seen quite an impressive run recently. As if its 65% run-up in 2017 wasn't impressive enough, the demand-side programmatic ad-buying platform has seen its stock surge 61% higher year-to-date, thanks mostly to the stock's 40% jump after its first-quarter earnings release last month.
Is there more where this came from? Or has The Trade Desk's steep rise suppressed the stock's upside potential?
There are undoubtedly times when a stock's rapid rise over a short period of time ultimately makes it overvalued, setting the stage for subsequent underperformance or even a major pullback. Streaming TV platform company Roku, for instance, saw its stock soar shortly after its IPO, with shares rising about 162% between the beginning of last November and the end of 2017; but Roku has since failed to live up to inflated expectations, sending shares down 29% year-to-date. But every now and then a stock's sharp gain is merely a sign of an outstanding company with an extraordinary opportunity in front of it.
This looks like one of those times.
Image source: Getty Images.
The raw numbers
|
Fiscal 2018 First-Quarter Key Metric |
Year-Over-Year Growth |
|---|---|
|
Revenue |
61% |
|
Net income |
86% |
|
Non-GAAP EPS |
89% |
|
Customers using at least 6 ad channels |
148% |
Data source: The Trade Desk fiscal 2018 first-quarter earnings release and earnings call.
The Trade Desk's competitive advantage
What gives The Trade Desk an edge as a programmatic advertising platform is the company's win-win value proposition to advertising agencies. Unlike Alphabet, Facebook, and Amazon's massive "walled garden" ad platforms, The Trade Desk is uniquely positioned as an independent buy-side platform that supports ad agencies instead of disrupting them.
The Trade Desk's vice president of data partnerships, David Danziger, describes walled garden advertising platforms as those "where the company running the ecosystem tightly controls access (or doesn't allow access) to outside applications, content, targeting, or measurement." The problem, of course, is that since targeting and reporting are limited, marketers have fewer tools at their disposal to optimize their ad spending.
This is where The Trade Desk steps in. As the largest independent programmatic demand-side platform, The Trade Desk gives agencies the tools to objectively optimize their ad spending. As marketers' budgets increasingly shift toward digital ads, The Trade Desk will stand out as a far less biased choice than walled garden platforms who are focused on driving ad spending that supports their own content.
Massive opportunities
A glance at The Trade Desk's soaring revenue and net income makes it nearly impossible for investors to overlook the company's momentum. Fiscal 2017 revenue was up 52% year over year as the company generated a meaty $95 million in earnings before interest, taxes, depreciation, and amortization (EBITDA). Then The Trade Desk's growth accelerated, when the company reported fiscal 2018 first-quarter revenue of $85.7 million, up 61% year over year. This compares to 42% year-over-year revenue growth in the fourth quarter of fiscal 2017. Net income in The Trade Desk's fiscal first quarter soared 86% year over year, up from 63% year-over-year growth in the company's fiscal fourth quarter of 2018.
This surging growth is driven by some extraordinary tailwinds. Consider The Trade Desk's 100% year-over-year growth in mobile video ad spending, 650% growth in audio ad spending, and 70% growth in spending on data.
But the ultimate opportunity for The Trade Desk is the rapid convergence of internet and TV. Spending on connected TV ads on The Trade Desk's platform was up 21 times in Q1 compared to the year-ago quarter. "There is nothing more exciting in media than what is happening in Connected TV," Green said about this massive opportunity in the company's most recent earnings call. "We started planting seeds in Connected TV years ago. In 2018, we are seeing the green shoots."
Betting on The Trade Desk
Of course, there's no stock without any risk. The Trade Desk's biggest risk really boils down to valuation. The company sports a price-to-sales ratio of 11 and a price-to-earnings ratio of 68. If The Trade Desk's growth decelerates rapidly, it could become difficult for The Trade Desk to live up to its valuation.
But for investors willing to hold for the long haul, The Trade Desk's unique value proposition to advertisers combined with its strong momentum across a range of advertising channels and geographic markets means there's a good chance The Trade Desk will not only live up to high expectations -- but possibly even exceed them.
