The coronavirus pandemic led to disruptions to businesses across the globe. The Trade Desk (TTD 4.97%) saw its sales contract as companies took an axe to their advertising budgets. Now, those companies are working toward resuming normal operations, and they need to get the word out. The Trade Desk is in a position to benefit as marketing budgets rebound given it helps buyers of advertising through its cloud-based platform, where businesses can create and optimize data-driven digital ad campaigns.
Let's take a deeper dive into the company to determine if you should buy The Trade Desk stock right now.
Revenue growth with healthy margins
Before the onset of COVID-19, The Trade Desk grew revenue by 52%, 55%, and 39%, respectively, in its fiscal 2017, 2018, and 2019. That level of growth is impressive on its own but even more so when you consider that they were achieved at healthy net profit margins of 16.5%, 18.5%, and 16.4%.
While the slashing of advertising budgets led The Trade Desk's revenue to decrease 13% in the second quarter, revenue for fiscal 2020 to date is still up from the prior year. What's more, in a press release, the company said, "The month of June ended strongly with ad spend growth turning positive on a year-over-year basis."
Indeed, the company cemented that bullish sentiment by telling investors it expects revenue to increase by 9% in the third quarter (at the midpoint) with earnings before interest, taxes, depreciation, and amortization (EBITDA) hitting about $30 million. The worst effects of the pandemic may be behind it.
Coming out of and during a recession, each incremental dollar spent at a business is under a microscope. After the financial crisis of 2007 and 2008, there was a significant shift into programmatic advertising because of its measurability. It will be interesting to see if there is another substantial shift coming out of the current recession induced by the novel coronavirus.
Data from Enlyft includes approximately 78,000 enterprises using The Trade Desk's services, and it appears the company generates a substantial chunk of its revenue from small businesses. Of the companies Enlyft tracks, an estimated 62% have fewer than 50 employees. Importantly, active small businesses shrank by 25% in April but recovered to 6% below pre-pandemic levels by July, according to Goldman Sachs. That robust recovery for The Trade Desk's largest base of clients bodes well for its outlook in the remainder of fiscal 2020.
Furthermore, large companies are expanding the share of their marketing budgets they allocate to programmatic advertising. According to The Trade Desk, the allocation from large businesses increased from $30 million in 2015 to $120 million in 2017. In addition to adding dollars, large companies' ad budgets are not as volatile -- a combination that will work in The Trade Desk's favor over the long run.
The company also has a significant opportunity for international expansion. The size of total global ad spend was estimated at $725 billion in 2019. Given that the company's services generates efficiencies for marketers, it is likely to grab an increasing portion of the global ad market. The Trade Desk is still in the beginning stages of expanding its footprint, and in its most recent quarter, just 12% of spending on its platform came from outside North America.
These opportunities for long-term growth can boost profitability too. The Trade Desk's self-serve software generates strong economies of scale. Recall that the company is guiding for revenue of $179 million (at the midpoint) in its current quarter, which would represent growth of 9% year over year. Meanwhile, management also expects adjusted EBITDA to hit at least $30 million -- that number would more than double the bottom-line reported in the prior-year period. When profit margins and sales are increasing simultaneously, it's usually a recipe for shareholder gains.
What this means for investors
Advertising industry trends are certainly in favor of The Trade Desk, and its growth prospects for the long run are excellent. However, that good news is already factored into its stock price, which is up over 85% year to date. The company is trading at a forward price-to-earnings ratio of 160 and a price-to-sales ratio of 33 -- both figures are record highs for the company.
Meanwhile, the company's near-term outlook is still tied to a resolution of the coronavirus pandemic, because the businesses that employ the The Trade Desk platform are sensitive to the macroeconomic pressures brought on by the outbreak. Therefore, it may be practical to wait for a pullback for this tech stock before acquiring shares.