With the Nasdaq not only rebounding from the coronavirus crash but even rising to new highs recently, it's getting increasingly difficult to find high-quality growth stocks that are still trading at reasonable valuations. The market has turned to top-notch tech stocks during this downturn, betting they are poised to thrive as work-from-home trends are accelerating organizations' digital transformations.
But a close look still reveals some growth stocks worth considering. The Trade Desk (TTD -1.03%), a provider of a data-driven digital ad-buying platform for marketers and ad agencies, is a good example of a high-quality tech stock that is still attractive. While its shares have soared in recent months alongside many other tech growth stocks, there may be more big upside to come over the next five years.
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2021 could be a huge year for The Trade Desk
Zooming out to the long-term outlook for The Trade Desk's business, its future looks bright -- particularly in 2021 and beyond.
COVID-19's impact on the economy put the spotlight on everything The Trade Desk stands for in digital advertising: control, measurement, and agility. The company's platform helps advertisers make data-driven marketing decisions across every digital ad format while maximizing their ad spend. This control and agility was particularly useful for marketers when the pandemic struck. The Trade Desk's customers were able to quickly pause campaigns, reduce budgets, and recalibrate their marketing messages -- all while constantly optimizing return on investment.
Compare this experience to the way traditional media often sells ad spots. In television, for instance, many marketers have to make large upfront commitments. Further, traditional television can't offer the same instant measurability that programmatic advertising (advertising bought through software based on pre-determined parameters) can.
After experiencing lockdowns that changed business and consumer demand nearly overnight, advertiser adoption of the programmatic solutions The Trade Desk offers will likely accelerate throughout 2020 and into 2021.
A once-in-a-lifetime opportunity in connected TV
An acceleration in demand for programmatic advertising will especially be true in television, where upfront deals still represent a lion's share of ad spend.
The opportunity in this channel would be difficult to overstate. Today, there's about $70 billion spent annually on traditional television ads in the U.S. and only about $7 billion spent on connected TV (CTV) ads. Over the long haul, The Trade Desk CEO Jeff Green thinks nearly all TV advertising will be transacted both digitally and programmatically (The Trade Desk's bread and butter) -- and he thinks the coronavirus pandemic is serving as a key tipping point for the shifting of marketer's budget from traditional TV to CTV.
"[L]inear TV's shelf life has shortened ... as viewers have moved en masse to CTV," Green explained in the company's first-quarter earnings call. "The biggest loser in all this is traditional linear television, and CTV is without a doubt, [the] biggest winner.
Growth may slow temporarily
Going into 2020, The Trade Desk was firing on all cylinders. Management even guided for an acceleration in its quarterly year-over-year revenue growth rates. But with marketers indiscriminately pausing their ad campaigns toward the end of Q1 as they coped with lockdowns, the company's first-quarter revenue took a hit during the last few weeks of the quarter. Revenue during the period grew 33% year over year, coming in at $160.7 million. This missed management's expectation for revenue of $169 million.
Investors will have to endure a lull in the company's growth story temporarily before revenue growth reaccelerates. Lockdowns and travel restrictions likely continued to weigh on The Trade Desk's business during Q2, as many retailers had their doors closed or were operating at limited capacity during the period. Advertising in impacted industries likely decreased substantially year over year.
But as the economy reopens, The Trade Desk is well positioned to gain market share from traditional TV and other outdated ad formats. Indeed, ad spend in The Trade Desk's connected TV channel is already reaccelerating to rapid rates.
A lucrative business model
The Trade Desk is a breath of fresh air compared to many other fast-growing tech stocks when it comes to profitability. The ad-buying platform earned $108.3 million of profit on $661 million of revenue in 2019. Further, The Trade Desk's adjusted earnings before interest, taxes, depreciation, and amortization was $214 million, up 34% year over year.
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Unlike other many other growth stocks who have to repeatedly raise capital through debt or equity, The Trade Desk can fund its growth investments with cash from operations. This simultaneously mitigates shareholder dilution and helps The Trade Desk constantly innovate and opportunistically invest.
Indeed, it's this profitable dynamic that is able to balance with rapid growth that attracted The Trade Desk's new CFO, Blake Grayson, to the company. In The Trade Desk's fourth-quarter earnings call, Grayson said:
It's rare, in my opinion, to find a company with such a unique value proposition in such a large and growing available market. It's also rare to find a company that can grow at a rapid rate, while producing profitable growth, even as we try to invest in the right areas as quickly as we can.
Severe turbulence expected
But here's the catch -- and it's a big one. Investors will have to pay up to buy into this exciting growth story. The Trade Desk currently trades at about 181 times earnings. The stock has essentially priced in 25%-plus annualized earnings-per-share growth for the next decade. Without this sort of momentum, shares could underperform.
However, investors willing to buy today and hold through the turbulence could be rewarded nicely over the long haul, albeit likely enduring significant volatility. With so much of the stock's valuation based on results far into the future, small changes in the company's trajectory can drive significant changes in sentiment for the stock in the near term. However, given the growth The Trade Desk demonstrated before COVID-19 rattled the economy, as well as the huge opportunity for programmatic advertising in connected TV, this ad tech company may just be getting started. The company's massive addressable market in CTV alone makes a good case for sustained high growth rates over the next decade.
