Shares of The Trade Desk (TTD 0.85%), the world's largest independent demand-side platform for digital ad buyers, more than quadrupled over the past 12 months. That rally might seem surprising, since many online advertising companies generated slower ad sales during the pandemic, but demand for The Trade Desk's services remained fairly stable throughout the crisis.
However, The Trade Desk also lost about a fifth of its value over the past month, for two main reasons. First, rising bond yields sparked a rotation from the market's frothier growth stocks toward value stocks. Second, new privacy measures from Apple (AAPL -0.57%) and Alphabet's (GOOG 0.37%) (GOOGL 0.35%) Google are threatening to throttle sales of targeted ads on multiple platforms.
Image source: Getty Images.
Should investors worry about those headwinds, or should they accumulate more shares of The Trade Desk now? Let's dig deeper into its core businesses and valuations to find out.
What does The Trade Desk do?
Digital ads are managed by demand-side platforms (DSP) and supply side platforms (SSP).
A DSP lets trade desks, ad agencies, and advertisers bid on ad inventories and manage multiple ad exchanges on a single platform. An SSP helps publishers -- which include websites, apps, and connected TV platform operators -- manage their own ad inventories and fill them with ads.
Magnite (MGNI 0.70%) and The Trade Desk are the world's largest independent SSP and DSP providers, respectively. However, the key term here is "independent", since larger advertising platforms -- such as Google -- offer both SSP and DSP services for their own ad inventories.
Google's DBP (DoubleClick Bid Manager) and AdWords are DSP services, while its DFP (DoubleClick for Publishers) and AdSense platforms are SSP services. Google's services can quickly spread a company's ads across its own ecosystem, but companies that want to reach beyond those walls need independent platforms like Magnite and The Trade Desk.
How fast is The Trade Desk growing?
The Trade Desk has generated robust revenue and earnings growth over the past five years. Its adjusted EBITDA margins also held steady.
|
Growth (YOY) |
2016 |
2017 |
2018 |
2019 |
2020 |
|---|---|---|---|---|---|
|
Revenue |
78% |
52% |
55% |
39% |
26% |
|
Net Income |
29% |
148% |
74% |
23% |
124% |
|
Adjusted EBITDA |
66% |
46% |
67% |
34% |
33% |
|
Adjusted EBITDA Margin |
32% |
31% |
33% |
32% |
34% |
Data source: The Trade Desk. YOY = Year-over-year.
Its revenue growth decelerated during the pandemic, but the expansion of the CTV (connected TV) market -- buoyed by legacy media networks expanding their new streaming services -- cushioned that blow. It also generated higher revenue from mobile video apps and streaming audio platforms.
The Trade Desk expects its revenue to rise 33%-35% year-over-year in the first quarter of 2021, and for its adjusted EBITDA to grow "at least" 41%. It didn't provide any exact guidance for the full year, but analysts expect its revenue to rise 35%, with a 19% decline in its adjusted earnings.
What headwinds could The Trade Desk face in 2021?
Wall Street expects its earnings to dip this year as it ramps up its investments. During last quarter's conference call, CFO Blake Grayson said the company would "increase the pace of our investments," especially on CTV platforms and promising international markets like China and Indonesia. It only generated 13% of its gross billings overseas last year, down from 15% in both 2019 and 2020.
Image source: Getty Images.
Two unpredictable headwinds could also throttle its top-line growth this year. The company expects Apple's upcoming IDFA changes for iOS 14, which will lets users to opt out of data tracking features in apps, to potentially impact 10% of its advertisers' spending.
Google's recent ban on third-party cookies, which are used to track browsing histories and online activities, could also hurt independent platforms like Magnite and The Trade Desk.
In a blog post, The Trade Desk's CEO Jeff Green admits Google's ban could impact web browsing-based ads, which account for about 20% of all data-driven ads today. Green calls that percentage "meaningful", but notes that the ban won't affect the company's rapidly growing CTV business. Green also points out that traditional cookies are already being replaced by newer login technologies such as Unified ID (UID) 2.0, which is built for better privacy and won't be affected by Google's ban.
The Trade Desk seems confident its business will continue to thrive even as Apple and Google change the rules of the game. That might be true, but The Trade Desk's stock is still priced for perfection at over 100 times forward earnings and more than 30 times this year's sales. Those valuations are arguably too high relative to its growth, and don't accurately reflect the near-term risks facing the company.
There are better growth stocks to buy right now
The Trade Desk is a promising growth stock, but it faces too many near-term headwinds and its stock is too expensive. There are plenty of other beaten-down growth stocks to pick from right now, and I'd rather stick with them instead of buying The Trade Desk's recent dip.
