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3 Reasons to Buy The Trade Desk, and 1 Reason to Sell

By Leo Sun – Updated Aug 13, 2021 at 1:34PM

Key Points

  • The Trade Desk’s stock recently dipped after it posted a strong second-quarter report with rosy guidance for the third quarter.
  • The company’s core business looks strong, but it’s cagey about the exact growth rates of its CTV and international businesses.
  • Its stock is priced for perfection at these levels.

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The ad tech company is firing on all cylinders -- but can it justify its valuations?

The Trade Desk's (TTD 4.97%) stock dipped on Aug. 9 after the ad tech company posted its second-quarter results. The market's reaction was surprising, since the company easily beat analysts' estimates and provided rosy guidance for the third quarter. Does The Trade Desk's post-earnings pullback represent a buying opportunity? Let's review three reasons to buy the stock -- and one reason to sell it -- to decide.

1. Its robust growth rates

The Trade Desk is the world's largest independent DSP (demand-side platform) for ads. A DSP lets trade desks, ad agencies, and advertisers bid on ad inventories and manage those ads on a single platform.

A person watches a large number of tiny screens.

Image source: Getty Images.

DSPs sit on the opposite end of the ad supply chain as SSPs (sell-side platforms), which help publishers manage their own ad inventories. Magnite (MGNI 6.65%) is the world's largest independent SSP.

The Trade Desk experienced a slight slowdown in 2020 as the pandemic throttled ad sales, but its momentum returned in the first half of 2021.

Period

FY 2019

FY 2020

Q1 2021

Q2 2021

Revenue Growth (YOY)

39%

26%

37%

101%

Non-GAAP Net Income

42%

90%

63%

97%

Adjusted EBITDA Growth (YOY)

34%

33%

81%

708%

Adjusted EBITDA Margin

32%

34%

32%

42%

YOY = Year-over-year. Source: The Trade Desk.

During the second quarter, The Trade Desk benefited from an easy comparison to the pandemic's initial impact a year ago. In the third quarter, it expects its revenue to grow "at least" 30% year-over-year, compared to expectations for 27% growth, and for its adjusted EBITDA to rise 30%. Analysts expect its revenue to rise 36% for the full year.

The Trade Desk also excels at retaining its customers. Its retention rate has remained above 95% for seven straight years, which gives it a wide moat against diversified advertising giants like Alphabet's (GOOG -0.44%) (GOOGL -0.55%) Google.

2. Its connected TV business

Like Magnite, The Trade Desk is relying on the growth of the CTV (connected TV) advertising market to reduce its dependence on older desktop and mobile platforms.

During its conference call, CEO Jeff Green said the CTV segment's growth "significantly outpaced" the company's 101% revenue growth, but didn't provide any exact numbers. Green noted its CTV revenue rose "more than tenfold" in Europe, and declared the CTV business would "continue to drive our growth over the next couple of years and beyond."

That bright outlook, which assumes streaming media platforms will render traditional "linear" TV platforms obsolete, matches analysts' bullish expectations for the CTV advertising market. For example, eMarketer expects CTV spending in the U.S. to surge from $13.4 billion this year to $24.8 billion in 2024 -- and ad tech companies like The Trade Desk and Magnite should benefit from that secular growth.

The robust growth of the CTV market should enable The Trade Desk to find fresh ways to counter Apple's privacy changes for iOS apps, as well as Google's planned ban on third-party cookies for Chrome in 2023. It believes a new industry standard, UID (Unified ID) 2.0, will address that seismic shift and enable advertisers to continue selling ads on mobile and desktop platforms without sparking privacy concerns.

3. Its international business

The Trade Desk generated 86% of its gross billings in the U.S. in the first half of 2021, which was unchanged from a year earlier.

However, it noted its year-over-year revenue growth in international markets outpaced its North American growth over the past three quarters. It didn't offer any exact revenue figures for the international segment, but it largely attributed its expansion to the growth of its European CTV business.

During the call, Green noted there was a "significant consumer shift to streaming platforms, even for live sports" across Europe, and the European CTV market wouldn't "stay small for very long." CFO Blake Grayson also noted that its business was "very strong" in Shanghai and Hong Kong.

Green also said that as the global ad tech industry "speeds toward $1 trillion TAM, about two-thirds of that will be outside the United States," and The Trade Desk would invest more money overseas to "capitalize on that international growth and serve a global advertiser customer base."

The one reason to sell The Trade Desk: Its frothy valuations

The Trade Desk's future looks bright, but its stock is also priced for perfection at about 110 times forward earnings and more than 30 times this year's sales. By comparison, Magnite trades at 40 times forward earnings and just eleven times this year's sales. 

So is The Trade Desk worth buying?

The Trade Desk should continue to grow for the foreseeable future -- but its high valuations, lack of financial clarity regarding its CTV and international segments, and the lingering concerns about Apple and Google's privacy-oriented moves could limit its upside potential this year.

Therefore, The Trade Desk might be worth nibbling on after its post-earnings dip, but I wouldn't accumulate a large position at these levels. I'd personally prefer to own Magnite or other more reasonably priced ad-tech stocks than The Trade Desk for now.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple and Magnite, Inc. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Magnite, Inc, and The Trade Desk. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Stocks Mentioned

Trade Desk Stock Quote
Trade Desk
TTD
$54.49 (4.97%) $2.58
Alphabet Stock Quote
Alphabet
GOOGL
$100.44 (-0.55%) $0.55
Apple Stock Quote
Apple
AAPL
$147.81 (-0.34%) $0.50
Alphabet Stock Quote
Alphabet
GOOG
$100.83 (-0.44%) $0.45
Magnite Stock Quote
Magnite
MGNI
$12.66 (6.65%) $0.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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