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Expect Strong Execution From The Trade Desk in Q3

By Daniel Sparks - Oct 27, 2019 at 4:45PM

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This next-generation digital advertising company looks poised to see more strong growth.

The Trade Desk (TTD -1.50%) investors have applauded the digital ad-buying platform's performance over the past year, sending shares up more than 70%. This gain has been supported by soaring revenue and profits.

The stock's strong performance, of course, makes The Trade Desk's third-quarter update all the more important. Can the company live up to its premium valuation? While there's no way to know whether shares will move up or down following the company's third-quarter update next month, investors can expect one thing with near certainty: more strong momentum in the company's underlying business.

Here are several reasons The Trade Desk is likely to report more robust business growth in Q3.

A person looking at charts on a laptop.

Image source: Getty Images.

An impressive track record

The most obvious reason to expect more strong growth from The Trade Desk in Q3 is its long track record of strong performance.

The company nearly doubled its annual revenue and net income between 2017 and the trailing-12-month period ended June 30, 2019. And impressive growth persists in recent quarters, with trailing-six-month revenue rising 42% year over year -- and that was on top of a tough comparison of 57% growth in the same period in 2018. Over the same timeframe, non-GAAP (generally accepted accounting principles) earnings per share soared 52%. 

While growth could decelerate in the coming quarters, the company's consistency in delivering strong growth is a good indicator that more of the same is to come.

Engineering capacity

But here's an interesting catalyst for The Trade Desk's execution in 2019 and beyond that may be underappreciated: engineering capacity.

During The Trade Desk's fourth-quarter earnings call earlier this year, the company said its engineering capacity was four times the size it was when it started work two and a half years ago on overhauling The Trade Desk platform as part of an effort it referred to as the Next Wave. In addition, the completion of the Next Wave in the summer of 2018, which was employing about 50% of the company's engineering resources, freed up significant human resources for future investments.

Given the company's growth in engineers and the freed-up capacity from the completion of the Next Wave, The Trade Desk went into 2019 with the engineering resources to build the equivalent of six next waves, said CEO Jeff Green in the company's fourth-quarter earnings call.

A lucrative business model

Next, there's the fact that The Trade Desk's attractive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of greater than 30% means that the company always has more than enough capital at its disposal to reinvest in its business.

"Adjusted EBITDA increased to $58 million and GAAP net income increased 45% to $28 million," explained The Trade Desk CFO Paul Ross in the company's second-quarter earnings call. "We achieved this while we continued to invest aggressively in areas critical to our future growth, such as on our platform and adding engineering and sales talent."

The Trade Desk has all the resources it needs to invest in growth opportunities -- and it's management's policy to only invest in areas that produce outsize returns. "That's how we operate. We consider this a great position of strength," said Green during the call.

Accelerated growth

The last sign that The Trade Desk is likely still seeing strong growth its recent revenue reacceleration. In Q2, revenue grew 42% year over year -- an acceleration from 41% growth in Q2.

"Our accelerating growth is a testament to the increasing trust that major global advertisers are placing in us, as they shift more of their advertising dollars to programmatic," said Green in the company's second-quarter earnings call.

For Q3, management guided for revenue of $163 million and adjusted EBITDA of $45 million. These figures compare to revenue of $118.8 million and adjusted EBITDA of $36.6 million in the third quarter of 2018.

The Trade Desk is scheduled to report its third-quarter results after market close on Nov. 7.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends The Trade Desk and recommends the following options: long January 2020 $60 calls on The Trade Desk and short January 2020 $125 calls on The Trade Desk. The Motley Fool has a disclosure policy.

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