Many tech stocks have been getting crushed this earnings season, even if their companies put up strong quarterly results. Most companies' valuations have been rocked, but the expectations from investors are still high for tech stocks, which means strong results are still not good enough for analysts. Even though the company beat analyst expectations, the current tech market sell-off caused shares to dip.
This was the case with The Trade Desk (TTD 3.35%) – the leading demand-side digital advertising provider. The company posted strong earnings and has an impressive new product. However, shares fell 7% when the company reported fourth-quarter and fiscal-year 2021 results on Feb. 15, 2022. The company still trades at over 32 times sales -- even after its fall in 2022 -- but I think shares are still worth buying because of its continued dominance in its market.
Image source: Getty Images.
Another strong quarter
Digital advertising is quickly becoming one of the best forms of advertising for companies looking to reach their target audience, for a few reasons. First, it allows advertisers to target specific audiences that they think will be most impressionable or more likely to act on their ad. Second, companies can track the engagement, viewership, and success of an ad directly. All of this can't be done with nondigital ads, like billboards or magazine ads. The Trade Desk is the leading platform for advertisers to place bids on ad spots, and the company uses artificial intelligence and machine learning to make sure that advertisers effectively reach their target audience.
As the leader in this space, the company has seen major growth. In 2021, the company reached almost $1.2 billion in revenue, which grew 43% year over year. Total ad spending on its platform topped $6.2 billion. With such scale, the company is quite profitable. The company has a non-GAAP net income margin -- which excludes a one-time stock compensation grant to the longtime CEO -- of 53% in Q4.
The company gathers data on engagement and viewership on every single transaction it enables. As the first-mover in the industry, it has the most data, which it uses to make the best recommendations to advertisers about where they should place ads. This continuous cycle of value for the advertiser is what allows the company to remain one of the biggest players in the advertising technology space.
Continuous innovation
On top of this evergreen data advantage, however, the company wants to make its platform the best it possibly can for advertisers. Earlier this year, the company scaled its Unified ID 2.0 platform, which allows advertisers to place targeted ads in front of customers without using cookies -- which compromise the privacy of those being advertised to. Cookieless advertising is a way of the future considering both Apple and Alphabet plan or have already gotten rid of cookies on their platforms. Sixteen platforms started using the open-source platform in 2021 -- and The Trade Desk can use all of the anonymous data that comes from this platform to make even better recommendations to its customers.
The company did not stop there, however. In Q4, The Trade Desk released OpenPath -- a new platform that provides advertisers with a direct source to publisher inventory. Some large-scale publishers -- companies who sell ad space -- do not use sell-side advertising companies that help them make the most bang for their buck on that ad space. Instead, they do it themselves, and OpenPath makes it easy for advertisers on The Trade Desk to connect with those doing this in-house. The company still has firm connections with sell-side platforms to supply the majority of their publishers, but OpenPath now opens up a new supply base for advertisers.
A trillion-dollar road ahead?
The Trade Desk is an industry leader in the digital advertising space, so some investors might not think there is much more room for it to grow. However, the company only controls 1% of the annual global advertising spend, and management believes the digital advertising market will be worth $1 trillion globally by 2025. With just $1 billion in annual revenue, the opportunity for The Trade Desk is clearly still large, and expect this figure to double by the end of 2023.
As long as The Trade Desk continues to capture data on transactions and use that data to give advertisers recommendations as to where they should advertise, its platform should remain valuable. Additionally, with its new products that bring new customer bases to advertisers, the Trade Desk's value is nearly unmatched. The company's competitive advantage as the market leader will likely allow it to continue seeing major success, and I think that the company could still be a great investment over the next decade.
