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Even After Explosive Growth, The Trade Desk is Still a Buy. Here's Why.

By Danny Vena - Dec 7, 2020 at 9:00AM

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This tremendous growth story is just beginning.

It's been quite a roller-coaster ride for investors in The Trade Desk ( TTD 2.28% ). Economic uncertainty earlier this year caused companies to slash their marketing budgets to preserve capital. Digital advertisers took it on the chin. The Trade Desk's shares, for example, lost 40% of their value. The stock has since come roaring back and is up more than 200% so far this year.

On this episode of Fool Live from Nov. 5, "The Wrap" host Jason Hall and Fool.com contributors Danny Vena and Lou Whiteman discussed The Trade Desk's third-quarter results and why the stock still has room to run in years ahead.

Jason Hall: Danny Vena, a lot of people wanted to talk about TTD, The Trade Desk earnings here. Can you give us a two-minute update on that?

Danny Vena: Absolutely. To set the stage for this, what happened earlier in the year, all of the uncertainty around COVID and a lot of companies that deal in digital advertising were hit pretty hard. There were a number of budgets, a lot of companies slashed their marketing budgets or advertising budgets, and as a result of that, companies like The Trade Desk, that does digital advertising ran into issues.

Now, I'm going to do a shared screen here for just a moment, so I can show you what's happening with The Trade Desk right now. As a result, if you look at this, for the three months that just ended, The Trade Desk grew revenue by 32% year-over-year, the revenue of $216 million. That was just completely crushed what Wall Street was expecting. Wall Street was expecting $181 million, so absolutely crushed it.

The diluted earnings per share of $0.84 nearly double what analysts were expecting. Just to give you a context, if we go back here and look, this is for the second quarter. You will notice that their year-over-year revenue was actually down 13%. To go from down 13% to up 32%. Last year when the company was growing gangbusters, it was up 38% and 40% for the year. This shows that The Trade Desk almost has its revenue back up to the growth rate that it was at pre-COVID.

A couple of other things, I'm going to scroll down here, Connected TV, which is one of The Trade Desk's biggest growth markets. Connected TV revenue grew over 100% year-over-year, and that was from a robust quarter last year. Mobile video spending grew 70%, audio spending grew 70%. The short version of this, is The Trade Desk has got its groove back. They were actually able to hunker down through the pandemic, and they were able to basically still get a little bit of growth in some of these other areas. But now that people are spending on their digital ad budgets again, The Trade Desk has taken off. The last time I looked at the aftermarket trading, looks like Trade Desk was up about 12%, although they could be higher now.

Jason Hall: Love it. Great stuff.

Lou Whiteman: It's a quarter revenue guidance too, as well, better than consensus to just exactly what you're saying. It looks like all that worry from earlier in the year, suddenly different angle now.

Jason Hall: Well, a couple of things going on for Trade Desk. Number 1, companies like [Alphabet's ( GOOGL 0.62% ) ( GOOG 0.46% )] Google, companies that they have pretty mature businesses that rely on ad revenues have had an interesting year because it's a big major recession. Companies have used the opportunity to cut their ad spend. That's [what normally] happens. But the thing is that the Trade Desk is that the right segment for where ad money is going to be going. It's skating to where the puck is going to be and that's hugely important.

The other thing too is that you think about where a lot of the smart money, so to speak, is looking for the next quarter. Something like $600 million to $700 million of the $1 billion that's been spent on this presidential election for advertising goes to TV. It goes to TV ad spending, and that's fourth-quarter ad, that's not third-quarter. Most of that money has been spent in October, and over the past few days.

Some of that stuff flows through the Trade Desk. When you think about programmatic advertising that goes on TVs, at smart TVs, but it goes on TVs, some of that is going. That's part of what I'm sure a lot of people are expecting that they are going to see. That's the whisper. That's going to be one of things that we're going to see.

Again, the factors that consumers are spending, we're getting into the holidays, people aren't flying to Hawaii. They're buying a bunch of stuff. It's really interesting to see how that affects the Trade Desk in the short-term. But again, for me, it's all about the long term, the long term prospects are wonderful for this company.

Danny Vena: Absolutely. I'm going to do a little bit of a humble brag here. I posted on Twitter back in March that the Trade Desk was down. I think it lost like half its value, and I thought that was one of the most ridiculous things that I had ever seen. I added significantly to my position in the Trade Desk, and that position has more than tripled. It was closer to quadrupling here not too long ago, and I bet by tomorrow it probably has.

Jason Hall: I can't remember for sure. I bought, this worked out OK. In my retirement account I only bought one time, I bought on April fifth. But it was in 2018, so it's up about 1,200%.

Lou Whiteman: Very good.

Jason Hall: I worked up that pretty well, and now let me tell you what, I didn't find this magical company. Our good colleague Daniel Sparks first introduced me to The Trade Desk. My investing thesis is find people that are super smart, like Danny, like Lou, Daniel Sparks. A lot of the other folks that we have in here and Brian Feroldi, and let them do all the hard work and then invest from there. So it makes a huge difference. It really, really does.

Lou Whiteman: I was late to the party, I just looked it up, March 18, so I'm up 335%. But if you adjusted down for what the S&P is up, that's only 291%. So I'm a loser here. But that again, with all other Fools.

Jason Hall: Love it. Absolutely love it. You know what? That's winning right there when you get those returns. Again, sure, maybe you could say, well, the best money has been made. It's still going to be a hell of a company over the next decade. This is programmatic ad on smart TVs is still a tiny thing and they're in such a great position. They're not competing against the big ad agencies, the ad agencies love them. So that's great, just absolutely.

Danny Vena: This is only a $30 billion company even now.

Jason Hall: Last I checked, the ad market is pretty big. Last I heard.

Lou Whiteman: You know what? This is a great reminder of one of the cardinal things that you hear from Motley Fool all the time. You guys, you got to imagine my portfolio has a lot of aerospace, a lot of airlines, a lot of things like that have really taken around the chin. I have more losers right now than winners probably, and the portfolio was still up. I'm still doing pretty well with it because, as David [Gardner] always say, you can only go down 100%, you can go up a lot more than that, and it only takes a couple of these to really offset. That's the whole idea of this, just buy good companies hold with them.

Jason Hall: Love it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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