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What Investors Might Be Missing With The Trade Desk

By Brian Withers and Matthew Frankel, CFP® - Mar 13, 2021 at 7:08AM

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Things should just get better from here.

The Trade Desk (TTD -1.94%) makes its money when advertising agencies are buying ad space for their clients. So for this ad tech platform, 2020 was a crazy year. During most of the year, advertising volume slowed to a crawl, but even so, The Trade Desk processed a record volume of spending throughout the year. On this Fool Live episode recorded on March 3, Fool contributors Matt Frankel and Brian Withers discuss results from its most recent quarter and what investors might be missing about the long-term opportunity of this growth stock.

Matthew Frankel: I guess we can go ahead and move on to The Trade Desk. Ten is less than 20, but we still have to keep it move, I guess. The Trade Desk is the second one. This is the stock that's also down about 20 percent since mid-February when it peaked. Not a coincidence, the decline happened right after its earnings report. Their earnings report, it was strong, but it wasn't a blowout, is the best way I can describe it. A lot of these tech stocks were priced that they were going to just blow the market's expectations away. The Trade Desk, they grew their revenue 26 percent year-over-year, which is pretty impressive given that the pandemic caused a lot of advertisers to really pump the brakes on spending.

Just to give you an idea of how it rebounded, 26 percent year-over-year growth for the full-year, 48 percent revenue growth in the 4th quarter. So it rebounded really nicely for the end of the year. Earnings nearly doubled in 2020, $6.85 a share versus $3.69. There were over four billion dollars of ad spending on The Trade Desk's platform in 2020, which was 34 percent higher than a year ago. One of the most impressive stats about The Trade Desk, and they report this quarter-after-quarter, which is what makes it so cool, their customer retention rate has remained over 95 percent, I think, every quarter for the past six years.

What I'm watching going forward, there's a couple of different dynamics that are working against each other in The Trade Desk's business. The global ad spending market is about $725 billion in size, so The Trade Desk adds about 0.6 percent of that right now. Huge shift into programmatic advertising, huge shift just in digital advertising.

We've learned today that Google it's going to be phasing out third-party ad-tracking, the tracking cookie, which is potentially bad news for The Trade Desk. That's why we're seeing the stock get hit as bad as it is today. If you haven't seen The Trade Desk, it was down about 10 percent last I looked. But, I think The Trade Desk is going to able to adapt to that. I think it's going to be just fine. I think it can capture a whole lot more of the ad spending market.

One positive thing is that the margins are really heading in the right direction in their business. I mentioned their earnings growth, a lot of that is due to the fact that net margins grew from 17 percent in 2017 to 29 percent in 2020. That's a pretty big margin expansion. I'd like to see that head in the same direction going forward. That's something I will be watching going into 2021.

In pretty much all of these companies, I won't repeat it for each one, but I'm going to watch how earnings normalize and revenue normalize in 2021. You had that 2nd quarter in 2020 that was really abnormal in one direction or another for pretty much every company in the world. I'm going to be watching that for The Trade Desk and all the other ones. Are you a Trade Desk fan?

Brian Withers: Yes, I am. I looked for last in 2020, the stock tripled. So taking a little breather here. It's amazing to me though that with some declining in volumes and whatnot, their margins have expanded so much. They must be getting much better at operating their business at scale. I imagine that could continue on that direction.

Matthew Frankel: Yeah, for sure. I think they're doing a great job of making the business more efficient as it scales, that'll get even easier to do. Like I said, they have about 0.6 percent of the global ad market right now, most of which has not migrated digital sources yet. I think they still have a ways to go.

Brian Withers: This one's the set-it-and-forget-it stock for me in my portfolio.

Matthew Frankel: Yes, that's fair.

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