The stock market has not been kind to advertising technology companies so far this year. Shares of advertising-dependent companies like Meta Platforms have plummeted, and even The Trade Desk (TTD -0.52%) -- a leading adtech platform -- is down by almost 50% this year.
Snap's (SNAP -1.96%) disappointing second-quarter earnings report added fuel to this fire. The company's growth was far below expectations, leading some investors to be concerned about the rest of the advertising industry. However, these worries might be overblown, particularly in the case of The Trade Desk. In fact, right now looks like a prime opportunity to buy its shares.
External factors are weighing on The Trade Desk
Adtech stocks have slumped as fear has grown that the U.S. is heading toward a recession. If a recession hits, businesses will cut back on spending, and one of the most easily trimmed expenses is advertising. Considering that The Trade Desk facilitates ad transactions and helps companies purchase advertising space, declining demand for ads would hurt its business.
Largely, this had been a theoretical concern for investors -- until Snap started feeling the negative effects of the challenging macroeconomic environment. In May, the company announced it was withdrawing its previous guidance for a top-line expansion in the range of 20% to 25% in the second quarter. The actual 13% year-over-year revenue increase it reported on July 21 was even more disappointing. And due to management's uncertainty about its outlook, it did not offer guidance for the third quarter.
The market's general response to this news was to assume the same factors that hurt Snap would hurt other digital ad sector businesses like The Trade Desk. However, these two companies diverge significantly in terms of business quality, and The Trade Desk is proving that.
The Trade Desk isn't Snap
The Trade Desk helps connect advertisers with sellers of ad space, and it has robust partnerships with hundreds of publishers. It works with top sell-side platforms like PubMatic, Microsoft's Xandr, and Magnite, and it has partnerships with large individual digital ad sellers like Yahoo as well.
This all provides The Trade Desk with a diverse inventory of ad space. Snap only has one source of ad inventory: its own platform. Therefore, if advertisers find advertising on Snapchat less effective than on other platforms, Snap has no alternatives to offer. On the other hand, a similar issue for one of The Trade Desk's hundreds of publishing partners would be less problematic for the adtech company.
As icing on the cake, The Trade Desk can supply inventory that might be more valuable to a given advertiser's campaign. If a business needs to cut its ad budget, it might reduce its spending on platforms that target niche audiences (like Snap) but continue buying ad space on larger platforms that reach broader audiences like Disney -- which recently inked a deal with The Trade Desk.
These benefits seem to be playing out right now. While Snap retracted its second-quarter guidance and subsequently underperformed analysts' expectations, The Trade Desk has reiterated its outlook for at least $364 million of second-quarter revenue. This suggests Snap's issues are not industry-wide problems.
Now could be a good entry point
Nonetheless, The Trade Desk stock has suffered. Its shares are down 49% year to date, bringing its valuation down to 18 times sales. On an absolute basis, this isn't cheap, but it is the company's lowest valuation since the very start of the COVID-19 pandemic.
Additionally, The Trade Desk is a high-quality company generating strong cash flow. As such, it might deserve a premium valuation. In the first quarter, it generated $105 million in non-GAAP net income and more than $136 million in free cash flow.
The Trade Desk is a cash-generating leader in its industry, and it can outperform its peers both over the short and long run. Given its low valuation relative to its historical levels, investors might want to dip their toe into this investment right now.