Stocks have tumbled since mid-February. The S&P 500 is down about 27% from Feb. 19, taking all sorts of industries down with it. Investors are grappling to understand how travel restrictions, store closures, stay-at-home orders, and other headwinds resulting from the pandemic are going to affect the companies in their portfolio.
On the bright side, those who are fortunate enough to have capital to put to work during this market crash have an opportunity to buy stocks at a significant discount compared to where they were trading just a few months ago. Of course, not all stocks are a buy just because they are trading lower. An investor's job, therefore, is to find where shares have been oversold. Case in point: The Trade Desk (TTD -2.60%) -- a fast-growing tech company that provides a platform for ad agencies and marketers to optimize their digital ad spend. This stock's beatdown is presenting investors with a great buying opportunity.
Shares have plummeted
Shares of The Trade Desk have been absolutely pummeled during this downturn, falling more than 50% from recent highs
Sure, there's a good reason for the stock to take a hit during this pandemic. Digital ad spend is contracting as many retailers have closed their doors temporarily to help curb the spread of COVID-19. Nearly a quarter of surveyed media buyers paused all advertising spend in March, and 46% indicated they are reducing their spend, according to data from Interactive Advertising Bureau (IAB).
While this may be bad news for the near-term performance of digital advertising companies like The Trade Desk, a $7 billion haircut to the ad-tech company's market cap is likely overkill. Once storefronts reopen, businesses begin returning to normal operations, and consumers start leaving their homes, marketers and ad agencies will ramp their spending back up and The Trade Desk's impressive growth will resume.
As the world's largest independent buy-side digital advertising platform, The Trade Desk is positioned in a sweet spot within the overall advertising industry. To this end, the data-driven ad-buying platform is seeing more rapid growth than "walled gardens" like Facebook (META -1.69%) and Alphabet (GOOGL -1.40%) (GOOGL -1.40%). In 2019, The Trade Desk's revenue increased 39% year over year. This compares to 16% and 27% year-over-year growth for Alphabet and Facebook's advertising businesses, respectively.
Better yet, this may only be the tip of the iceberg. The Trade Desk Jeff Green thinks advertisers are growing weary of "walled gardens," or advertisers that only provide and enable measurement of ad performance within their own ecosystem of ad inventory. Further, Green believes that the migration of ad budgets from traditional television to connected TV (CTV) will force many walled gardens to open up their inventory since CTV is poised to be both a massive and fragmented market. A "walled garden" approach only works "if you're big enough so that marketers are afraid not to buy from you," Green explained in the company's fourth-quarter earnings call. "In TV, this [type of] market share concentration does not exist. No studio, no channel, no cable company, no MVPD, no one has the leverage to pull that off in TV."
According to Green, therefore, the fast-growing CTV market will drive a "quantum leap" forward in programmatic advertising in the coming years.
Of course, The Trade Desk's advertising revenue growth will likely slow in Q2 as businesses deal with this pandemic. But once marketers resume their ad spend, The Trade Desk is well-positioned to continue gaining market share, particularly in the nascent CTV market.
A strong balance sheet
In such uncertain times, investors should be prepared for the worst. By investing in companies with both great long-term prospects and healthy balance sheets, investors can reduce the risk of their holdings facing financial distress during a potential recession. Fortunately, The Trade Desk has a healthy enough balance sheet to not only give its employees assurance that it's refraining from layoffs, but to even continue adding to its headcount during this crisis. Taking a look at its balance sheet, The Trade Desk ended 2019 with a total of $255 million of cash and short-term investments and no debt. Further, The Trade Desk is very profitable, generating $108 million of net income during 2019. On a non-GAAP (adjusted) basis, 2019 net income was $176 million, up from $124 million in 2018.
Trading close to $160 per share, this is a great opportunity for investors to buy a high-quality growth stock at a good price. Of course, this doesn't mean shares won't fall further. It's impossible to time the bottom of any stock market investment. But five years from now, I believe today's price will look like a great entry point in hindsight.