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The Trade Desk Has a Lot to Prove When It Reports Earnings

By Danny Vena - Feb 22, 2020 at 9:32AM

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After gaining nearly 100% over the past year, the data-driven advertising specialist has a lot riding on its financial results.

The Trade Desk (TTD -1.50%) was one of the top performers of 2019, with its stock soaring more than 123% for the year. What's even more impressive is that those gains came on the heels of 150% growth in 2018.

In the light of that stunning two-year move, investors will be looking for the company to maintain the revenue growth and profitability that drove its impressive stock run. The company is scheduled to report the results of its fourth quarter after the market close on Thursday, Feb. 27. Let's look a few things The Trade Desk will have to do for its stock to maintain its upward trajectory.

Smiling co-workers gathered around a conference table, with one wearing a t-shirt with The Trade Desk logo.

Image source: The Trade Desk.

Continued robust revenue growth

One of the biggest contributors to The Trade Desk's success over the past couple of years has been the company's standout revenue growth, which has moderated slightly compared with last year. For the third quarter, The Trade Desk delivered revenue growth of 38% to $164 million, but that growth was down from 50% gains it produced during the year-ago quarter.

Management is expecting the overall deceleration to continue, forecasting revenue of $213 million, an increase of 33% year over year. Wall Street is clearly believes the forecast is accurate, with analysts' consensus estimates coming in at $213.4 million, just ahead of the company's guidance. 

Increasing profits

While many high-growth stocks take years to produce earnings, The Trade Desk has been the exception to the rule, generating a profit from its very first quarter as a public company back in September 2016. This is one of the reasons investors have flocked to the stock, and the company has continued to oblige by boosting its bottom line in the months and years since.

In the third quarter, The Trade Desk grew adjusted EBITDA 31% year over year, resulting in adjusted diluted earnings per share (EPS) of $0.75.

For the upcoming quarter, the company is forecasting adjusted EBITDA of $78.5 million, up about 16%. The Trade Desk doesn't provide per-share guidance, but analysts are expecting adjusted EPS of $1.17, an increase of about 7% year over year.

Continued channel expansion

One of the highlights of The Trade Desk's recent surge was from some of the company's newest channels, which also happen to be delivering the strongest growth.

Ad spending in the connected TV segment (CTV) grew 145% year over year, after producing growth of 300% and 250% in the first and second quarters, respectively. What makes this even more impressive is that it's on top of explosive growth in 2018, climbing 800% year over year. During the third-quarter conference call, CEO Jeff Green said, "CTV is the most strategically important focus of our business going into 2020. We invested early in our CTV infrastructure and in the supplier ecosystem, and we're seeing the payoff of those investments accelerate."

Growth in the audio segment -- which includes music and podcasts -- was similarly robust, up 160% year over year, after growth of 270% in each of the two previous quarters. This was also on top of impressive gains in 2018, having jumped 230% year over year.

Of these two high-growth areas, Green said, "CTV and audio are two of the most effective forms of advertising because of high audience engagement."

A word of caution

The Trade Desk has soared over the past year, gaining nearly 100%. After such a run, it's only natural that the stock would sport a lofty valuation. The trailing-12-month price-to-earnings (P/E) ratio clocks in at a nosebleed-inducing 153, while the forward valuation is an only slightly more reasonable 82.

Given the company's historically strong growth, it deserves a premium valuation. That said, it also possesses a level of gut-wrenching volatility. If The Trade Desk fails to deliver everything investors are hoping for, the stock could face a harsh sell-off. If investors have any doubts, they should remember that in the weeks following its second-quarter 2019 results, the stock lost about one-third of its value, before beginning its recent sprint.

While the long-term prospects for The Trade Desk are excellent, ownership requires a strong stomach to handle the volatility.

Danny Vena owns shares of The Trade Desk. The Motley Fool owns shares of and recommends The Trade Desk. The Motley Fool has a disclosure policy.

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