Late last month, Snap told investors that the macroeconomic environment was deteriorating more quickly than expected. In a nutshell, rampant inflation has caused many businesses to reduce their ad budgets simply because rising prices and supply chain issues are likely to be a headwind to consumer spending. In response to Snap's warning, many investors decided to bail on the sector.
The Trade Desk (TTD +1.68%) was one of several companies swept away in the sell-off. With the dust now settled, the stock is down 55% from its high, but the macroeconomic situation could get even worse. In fact, the U.S. Department of Labor recently said inflation hit a new 40-year high in May. That news probably has some shareholders ready to run for the exit, but this is actually a great time to buy a few shares.
Here's why.
NASDAQ: TTD
Key Data Points
Warren Buffett's advice
Warren Buffett once told investors to be fearful when others are greedy and greedy when others are fearful. That doesn't mean every stock that goes down is a bargain. It simply means that downturns are a great time to buy high-quality businesses. The Trade Desk checks that box.
The company operates a platform powered by artificial intelligence (AI) that helps advertisers create, measure, and optimize data-driven campaigns across channels like desktop, mobile, and connected TV. While The Trade Desk is far from the largest player in the industry, it is the largest independent buy-side platform, meaning it doesn't own any content or ad inventory.
By comparison, tech titans like Alphabet and Meta Platforms own content platforms like Google Search and Facebook, respectively, which means they are incentivized to steer ad buyers toward their own inventories. The Trade Desk's independent nature eliminates that conflict of interest and keeps its values aligned with its customers.
Additionally, Alphabet and Meta Platforms are often referred to as "walled gardens" because they operate tightly controlled ecosystems. For instance, they provide advertisers with limited access to data, making it difficult to measure campaign performance. Moreover, because Alphabet and Meta Platforms sell their own ad inventories alongside those from third-party publishers, any data that brands bring to the platform can be co-opted and used against those publishers.
The Trade Desk does the exact opposite, focusing on objectivity and transparency. That value proposition has caught Walmart's attention. As the world's largest advertiser, Walmart has a tremendous amount of first-party shopper data, and it elected to partner with The Trade Desk -- not Alphabet or Meta Platforms -- to make that data available to brands.
With great scale comes great AI
As the largest independent buy-side platform, The Trade Desk benefits from significant scale. Its platform interfaces with over 100 ad exchanges and supply-side platforms, giving media buyers access to over 13 million ad opportunities every second. In turn, each campaign powered by its platform generates more consumer data, making its AI engine a little better at driving clicks and conversions.
That value proposition has helped The Trade Desk keep its customer retention rate above 95% for eight straight years and has translated into impressive financial results.
|
Metric |
Q1 2019 |
Q1 2022 |
CAGR |
|---|---|---|---|
|
Revenue (TTM) |
$512.6 million |
$1.3 billion |
36% |
|
Free cash flow (TTM) |
$54.5 million |
$393.8 million |
93% |
Data source: YCharts. Chart by author. TTM = trailing-12-months. CAGR = compound annual growth rate.
Invest in trends, not cycles
It's important to distinguish between cycles and trends. Macroeconomic downturns are cyclical. This is not the first time the stock market has been battered by high inflation, nor will it be the last. I'm not arguing that The Trade Desk's stock will soar tomorrow. Its share price could certainly fall further. But trying to time a cycle is a fool's errand. No one knows when inflation will moderate or the market will rebound.
Rather than trying to predict the future, investors should focus on trends. Ad spend is shifting to digital channels, and there is no going back. Digital ad spend hit $490 billion worldwide last year, according to eMarketer, and that figure is expected to reach $785 billion by 2025. That puts The Trade Desk in front of a massive opportunity, and with shares trading at 18 times sales -- far cheaper than their three-year average of 30 times sales -- now is a good time to buy this growth stock.
As a final thought, consumers spend about one-third of their time online within walled gardens and the other two-thirds on the open internet. Even so, walled gardens captured more than 60% of global digital ad spend last year. That discrepancy cannot go on forever. Ad dollars will eventually follow consumers to the open internet, and The Trade Desk should benefit greatly.
