Are Analysts Underestimating The Trade Desk?

Do analyst forecasts for a meaningful deceleration in revenue growth fully appreciate The Trade Desk's enormous opportunities?

Daniel Sparks
Daniel Sparks
Aug 17, 2018 at 5:36PM
Technology and Telecom

Shares of The Trade Desk (NASDAQ:TTD) have risen 46% since I called the demand-side programmatic ad-buying platform provider my "top stock to buy" just a few months ago, and further outperformance is likely. Considering the company's profitable business model, its significant momentum, and big opportunities for further growth, there's a strong bull case for the stock -- one that analysts seem to be overlooking.

One key reason to be optimistic about The Trade Desk is the unmistakably bullish commentary from management recently. Any investor who tunes in to a recent interview with The Trade Desk CEO Jeff Green or listens in on management's earnings calls will likely come away with a similar takeaway: This is just the tip of the iceberg for The Trade Desk.

A person drawing three arrows, one of which indicates a more rapid growth trend.

Image source: Getty Images.

Lucrative customer relationships

When asked during The Trade Desk's most recent earnings call about the drivers behind the company's accelerating revenue and profit growth in the first half of the year versus the second half of last year, Green provided some insight into favorable customer trends.

First, The Trade Desk is seeing a slightly higher percentage of revenue coming from new customers. This is notable since The Trade Desk's typical customers "tend to be platform users that use our platform forever and they maintain relationships with lots of advertisers," Green explained. New customers, therefore, are extremely valuable. Currently, about 90% of revenue is coming from existing customers, and 10% is from new customers, said the CEO.

Second, Green explained that since the company's customers are usually advertising agencies, they are typically the ones that take on new brands -- not The Trade Desk. This means brand additions to its ad-buying platform are lucrative because The Trade Desk's customer does the work of bringing the brand to the platform. Since "[our customer is] bringing on a new brand, ... our customer is the same, we're getting more spend," Green said.

It takes time for big brands to ramp up their spending

The Trade Desk's chief operating officer, Rob Perdue, emphasized the fact that it takes time for brands -- especially the big ones -- to ramp up their spending as they test the platform:

Jeff has often said on calls like this [that] the bigger the brand, the longer it takes them to sort of really ramp. And so we had a significant amount of meaningful wins in Q3 and Q4 last year where they were testing us and then came onto the platform in a more meaningful way in Q1 of this year and then even more in Q2.

Better yet, The Trade Desk is still winning over big brands. "And so we've had a similar trend of wins, I would say, in Q2," Perdue said.

The COO continued:

[T]hat gives us confidence as we head into next year. The size of the wins that we've had, that are just starting with us now testing, really is a harbinger for what we think 2019 could be.

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More massive growth ahead

Last, and perhaps most importantly, the marked deceleration in revenue growth analysts are guiding for in the remainder of this year and for next year contrasts with management's bullish commentary about the company's tailwinds and opportunities.

On average, analysts expect The Trade Desk's revenue for its third quarter of 2018 to rise 47.6% year over year and revenue in Q4 to increase 40.6%. For 2019, the consensus forecast calls for 32% revenue growth.

But Green's bullishness on programmatic advertising overall, the enormous opportunity in connected TV, and the potential for programmatic advertising in China point to the likelihood of not just strong growth in the coming quarters -- but possibly even accelerating growth.

Consider these remarks from Green in the company's most recent earnings call:

[L]et me reiterate that while we are excited about The Trade Desk's current performance, we see even more potential for the future. As the worldwide advertising market grows to $1 trillion, we believe it will move to programmatic. Programmatic is the fastest-growing segment of advertising, and The Trade Desk is growing faster than anyone in programmatic.

When we see surprises, they typically are to the upside. There is a generational shift happening with the convergence of the internet and TV globally. Massive markets like China are just starting to adopt programmatic, and I believe it is highly probable that the programmatic industry in years ahead will see accelerating growth. 

And The Trade Desk certainly doesn't plan to sit idly by. "We see the opportunity, and now is the time to invest in growing market share and revenue," the CEO added. "We believe The Trade Desk is well positioned to realize this growth for the rest of the year, next year, and beyond."

Of course, management's guidance for third-quarter revenue of $116 million and full-year revenue of "at least $456 million" indicate decelerating revenue growth not far off from analysts' estimates. But The Trade Desk has crushed its own guidance recently, giving investors plenty of reason to look beyond management's guidance figures and give weight to its rosy commentary.