Shares of The Trade Desk (TTD 1.71%) closed at an all-time high of $111.64 last November. But as of this writing, the advertising technology company's stock trades just above $50.
Like many other growth stocks, The Trade Desk's stock declined over the past six months as rising interest rates and other macro headwinds sparked a retreat toward more-conservative investments. But does that pullback represent a good buying opportunity for long-term investors?
Image source: Getty Images.
What does The Trade Desk do?
The Trade Desk operates the world's largest independent demand-side platform (DSP) for digital ads, which enables ad agencies, advertisers, and trade desks to bid on programmatic ad inventories and manage their own ads. DSPs sit on the opposite end of the ad supply chain as sell-side platforms (SSPs) like Magnite (MGNI 1.02%), which help publishers and digital media owners manage and sell their own ad inventories.
The Trade Desk served more than 1,000 customers in its latest quarter while maintaining an impressive retention rate of more than 95%. It mainly serves ads from mobile, desktop, and connected TV (CTV) platforms.
The company's newest platform, Solimar, helps advertisers navigate the latest privacy updates from Apple and Alphabet's Google by crafting ad campaigns with their first-party data (info collected directly from customers). It's also adopting a newer technology called Unified ID (UID) 2.0, which eliminates the need for third-party cookies.
Those upgrades strengthen its mobile and desktop ads, but it currently generates most of its growth from its CTV business, which is expanding rapidly as linear TV platforms fade away and ad-supported streaming-video platforms lock in more viewers. In 2021, its number of advertisers that spent over $1 million on CTV ad campaigns nearly doubled from 2020.
During the company's latest conference call, CEO Jeff Green pointed out that he spent "many of the last 10 years publicly predicting that Netflix (NFLX 0.10%) and nearly everyone else would eventually show ads," a prediction that finally came true earlier this year with Netflix's grudging decision to launch an ad-supported tier.
How fast is The Trade Desk growing?
The Trade Desk's revenue rose 26% in 2020 as the pandemic's initial impact throttled ad sales across the world. But in 2021, its revenue increased 43% to $1.2 billion as the lockdown measures were relaxed. Its adjusted net income in 2021 increased 36% to $456 million, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 77% to $503 million for the year, which boosted its adjusted EBITDA margin for all of 2021 from 34% to 42%.
In the first quarter of 2022, revenue rose 43% year over year to $315 million, its adjusted net income grew 50% to $105 million, and its adjusted EBITDA surged 70% to $121 million. That across-the-board growth was impressive, considering how difficult the year-over-year comparisons were:
|
Period |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
37% |
101% |
39% |
24% |
43% |
|
Adjusted EBITDA growth (YOY) |
81% |
708% |
59% |
25% |
70% |
|
Adjusted EBITDA margin |
32% |
42% |
39% |
48% |
38% |
Data source: The Trade Desk. YOY = Year over year.
In the second quarter, it says it expects its revenue to grow "at least" 30% year over year to more than $364 million, and for its adjusted EBITDA to increase approximately 3% to $121 million (which implies an adjusted EBITDA margin of 33%). Once again, those growth rates are very high compared to its triple-digit growth rates in the prior-year quarter.
It's been experiencing strong growth across the travel, pets, food, drink, and shopping verticals in a post-lockdown market, and it expects the upcoming U.S. midterm elections to generate additional tailwinds through the end of the year. It generates only a single-digit percentage of its revenue from Europe, which limits its exposure to the Russia-Ukraine war, and it isn't struggling with supply chain disruptions like Magnite.
NASDAQ: TTD
Key Data Points
A strong outlook with a premium valuation
The Trade Desk didn't offer any exact guidance beyond the second quarter, but analysts expect its revenue and adjusted EBITDA to grow 33% and 23%, respectively, for the full year. Based on those expectations, its stock trades at 16 times this year's sales and 41 times its adjusted EBITDA.
Magnite -- which is growing at a slower rate on a pro forma basis (which smooths out its recent acquisitions) -- trades at just three times this year's sales and seven times its adjusted EBITDA. Therefore, The Trade Desk's near-term growth might be capped by its premium valuations.
However, I believe The Trade Desk's strong growth rates, its stable adjusted EBITDA margins, and balanced exposure to the growing CTV advertising market still make it a good long-term investment. I'd happily buy some shares at these levels, but I'd also keep some of my powder dry to average down if a market crash further compresses its valuations.
