The Trade Desk (TTD -4.00%) posted its fourth-quarter earnings report on Feb. 16. The advertising technology company's revenue rose 24% year over year to $395.6 million, beating estimates by nearly $6 million. Its adjusted net income increased 13% to $208.1 million, or $0.42 per share, which also topped expectations by $0.14.
Those headline numbers were impressive, but The Trade Desk's stock barely advanced following a few wild swings throughout the day. The stock also remained down nearly 30% over the past three months. Should long-term investors pick up some shares of this ad tech company today?
A strong post-lockdown recovery
The Trade Desk operates the world's largest independent demand-side platform (DSP) for digital ads. It helps ad agencies, advertisers, and trade desks bid on programmatic ad inventories and manage their ads.
The Trade Desk suffered a significant slowdown in 2020 as the pandemic's initial impact temporarily throttled its ad sales. But those headwinds waned throughout 2021, and its growth accelerated again.
For the full year, its revenue rose 43% to $1.2 billion, marking an acceleration from its 26% revenue growth in 2020. Its adjusted net income increased 36% to $456 million, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 77% to $503 million. Its adjusted EBITDA margin expanded from 34% to 42%.
Its revenue growth decelerated in the fourth quarter, partly due to tough comparisons against the political ad purchases a year ago, but its adjusted EBITDA margin expanded sequentially and remained flat year over year.
Period |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
---|---|---|---|---|
Revenue Growth (YOY) |
37% |
101% |
39% |
24% |
Adjusted EBITDA Margin |
32% |
42% |
39% |
48% |
For the first quarter, it expects its revenue to grow "at least" 38% year over year to more than $303 million, with an adjusted EBITDA of approximately $91 million. That forecast exceeded analysts' expectations for 31% revenue growth, but it also implies its adjusted EBITDA margin will decline both sequentially and year over year to about 30%.
For the full year, analysts expect The Trade Desk's revenue to rise 31%, its adjusted EBITDA to grow 19%, and its adjusted EBITDA margin to contract by about four percentage points to 38%. That forecast implies the company will likely ramp up its investments in the connected TV (CTV) and international markets over the next few quarters.
Understanding the tailwinds
The Trade Desk's growth was driven by video-based ads throughout 2021. CTV and mobile ads each generated about 40% of its revenue, while the remaining 15% and 5% came from display and audio ads, respectively.
During the conference call, founder and CEO Jeff Green said the CTV market "was once again the largest driver of spend on our platform" in 2021. Green didn't disclose any exact revenue figures or growth rates but noted that more than 15,000 advertisers purchased CTV ads throughout the year. Green also said that the number of advertisers that spent more than $1 million on CTV ad campaigns nearly doubled from 2020.
Green also pointed out that its upgraded platform, Solimar, was boosting its engagement rates, with the average channel usage for Solimar ad campaigns increasing by approximately 50% over its legacy platform. Solimar is also more effective at collecting and analyzing data for advertisers.
Unlike many other advertising companies, The Trade Desk doesn't face significant headwinds from Apple's privacy update on iOS or Alphabet's forthcoming privacy changes for Google Chrome and Android for three reasons: CTV ads aren't heavily exposed to those platform changes, Solimar enables advertisers to tap their own first-party data to craft ad campaigns, and it's gradually pivoting toward a new technology called Unified ID (UID) 2.0 to eliminate its dependence on third-party tracking cookies.
High valuations and near-term challenges
The Trade Desk's stock isn't cheap at 65 times its adjusted EBITDA and 25 times its projected revenue for 2022.
Magnite (MGNI -6.39%), which sits at the opposite end of the ad supply chain as the world's largest independent supply-side platform (SSP) for digital ads, trades at 10 times its adjusted EBITDA and three times its estimated sales for 2022. Magnite expects to generate more than 25% annual revenue growth (on an organic basis), with an adjusted EBITDA margin of 35%-40% over the next few years -- which suggests it's growing at a comparable rate as The Trade Desk but more cheaply valued.
The Trade Desk's higher valuation could limit its upside potential in this challenging market for growth stocks. Broad sell-offs in ad tech stocks driven by Apple and Google's ongoing platform changes -- which are frequently causing investors to blindly toss out the babies with the bathwater -- could exacerbate that near-term pressure.
Therefore, I wouldn't rush to buy The Trade Desk right now. It's a solid company, but we'll probably see lower prices later this year as interest rates rise and negative ad tech headlines compress its high valuations.