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I Just Added The Trade Desk to My Watchlist. Here’s Why.

By Lawrence Nga - Apr 8, 2020 at 8:10AM

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The Trade Desk is well-positioned to create enormous value for investors.

The Trade Desk (NASDAQ:TTD) is a fast-growing tech company that helps ad agencies and marketers optimize their digital ad spend. Listed in 2016, it has had a good run since its IPO, with revenue more than tripling while net profit surged by more than 500%.  These numbers are impressive, but I think its best days are yet to come.

Woman sitting in front of a computer

Source: Getty Image

Solid execution

Founded in 2009, The Trade Desk has grown by leaps and bounds over the years. In the last four years alone, revenue rose 481% to $661 million -- a compound annual growth rate (CAGR) of 55%. Net profit attributable to shareholders performed even better, up by a CAGR of 87% to reach $108 million.  

Such financials are remarkable considering that many of its high-growth peers (some with significantly higher revenue and bigger scale) have had trouble breaking even. The Trade Desk, on the other hand, has been profitable since 2013.  

Many factors contribute to The Trade Desk's strong track record. For one, it is fanatically focused on making its customers (ad agencies and their respective customers) successful. By offering a transparent, and data-driven platform, it enables advertisers to put out the right ad in front of the right consumers. This not only helps advertisers get better advertising outcomes but also allows them to maximize the value of their budget.

Moreover, founder and CEO Jeff Green has been an important force behind the company's success. An industry veteran with significant advertising experience, Jeff exhibits several positive traits that I look for in a leader: He's visionary and long-term-focused, and he has a well-established track record (before this, he founded the first online advertising exchange, later sold to Microsoft), and significant skin in the game (he owns about 5.3 million  shares worth roughly $855 million ). The Trade Desk has performed well under his leadership in the past and should continue to do so in the future.

Plenty of growth opportunities

In the recent fiscal year ended Dec. 31, 2019, The Trade Desk reported that revenue was up by 39% year over year to $661 million, thanks to a 33% increase in gross spend on its platform to $3.1 billion. Despite its strong performance, the company's share of global ad spending is less than 1% of global ad spending ($725 billion in 2019, by the company's own estimates), giving it ample room for growth.

Notably, it is riding on two huge tailwinds -- the shift to digital advertising (practically anything that deals with the internet) and the transition to programmatic ad buying (buying ads online in real time via automation, rather than through human negotiations) --that may last for decades. On top of that, the company's aggressive expansion into overseas markets like Europe and Asia further expands its addressable market. To this end, it could leverage its existing customer relationships to grow in these new markets since many of them already operate in these markets.

In the near term, however, The Trade Desk might face temporary challenges stemming from the COVID-19 outbreak. As businesses close their doors to help curb the spread of the virus, they might cut their ad spending to conserve cash. Thus, there is a risk that these cuts might impact the company's short-term growth rates. Despite this, in late February the tech company guided for higher ad spend on its platform in 2020 of at least $4.24 billion (37%  greater than that of 2019).

A word on valuation

Shares of The Trade Desk have declined significantly during the recent market sell-off. From its peak of $323.78 in February, shares are down by about 40%.  Despite the drop, the stock is anything but cheap. It's still trading at more than 80 times earnings.

On one hand, I would argue that The Trade Desk is a high-quality company that deserves a premium valuation. On the other, its steep price means that investors buying the stock now would have very little margin of safety. On balance, I would play it safe and keep the stock on my watchlist until its valuation becomes more attractive.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and The Trade Desk and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Trade Desk Stock Quote
The Trade Desk
$75.80 (1.76%) $1.31
Microsoft Corporation Stock Quote
Microsoft Corporation
$290.54 (-0.47%) $-1.37

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