In a quarter when several ad tech-related companies (including Meta Platforms, Snap, and Twitter) reported a weak demand environment, The Trade Desk (TTD 1.67%) was a standout exception.
The Trade Desk's second-quarter earnings came out earlier this month and it reported a revenue jump of 34.6% year over year to $377 million, ahead of analysts' consensus estimate of $364.9 million. The company reported non-GAAP (generally accepted accounting principles) earnings per share (EPS) of $0.20, in line with the analysts' expectations. The Trade Desk has also guided for revenue of at least $385 million for the third quarter, implying a healthy 28% year-over-year growth rate.
Since that earnings release on Aug. 9, the stock price is up about 20%. There are a couple obvious reasons this stock is worth consideration. There is the price rally of late, as well as the company's long-term growth potential and its general dominance in the ad tech industry. But there are also at least three less-obvious reasons why this stock can prove to be a good buy even now. Let me explain.
1. The Trade Desk is dominating the CTV ad space
The Trade Desk has emerged as a major beneficiary of the shift in ad spending from linear TV to connected TV thanks to its strategy of aggressively forging joint business plans or long-term deals with leading brands across verticals that have plans to increase spend on the company's platform. The company reported an increased pace at which it forged new joint business plans or expanded existing ones in the first half of 2022.
In the digital advertising world dominated by walled gardens such as Alphabet and Meta Platforms, The Trade Desk's focus on transparency and objectivity is seen as a solid positive. Unlike many of its competitors, The Trade Desk does not own any content or advertising inventory. Hence, it has no incentive in steering or excessively charging clients for its own ad inventory. Since there is no conflict of interest, The Trade Desk is in a better position to take decisions best suited for its clients.
The Trade Desk also boasts of scale (with access to over 600 billion ad impressions every day) and robust artificial intelligence capabilities. As more streaming players opt for advertising-based video on demand (AVOD) and open their ad inventory to the demand-side ad tech players, the company will further benefit from an overall expansion in the targeted market opportunity.
2. The Trade Desk sees opportunity in retail media
The Trade Desk is also targeting the U.S. retail media market (also called the shopper market) opportunity, estimated to grow annually by 25% from $36 billion in 2021 to $110 billion in 2026. Retailing media is basically large retailers shopping out their sales websites to individual brands and other companies that want to promote products available at those retail sites.
For example, The Trade Desk has partnered with the largest retailer in the world, Walmart, to build a demand-side platform called Walmart DSP. Walmart's omnichannel first-party data is enabling advertisers to run more effective ad campaigns. This is a win-win situation for all parties. Brands are earning a higher return on investment, Walmart is earning additional revenue for ad space on its properties, and The Trade Desk is getting access to even more clients.
3. The Trade Desk benefits from strong network effects
The Trade Desk is an independent demand-side platform, with access to huge troves of first-party data. The company uses this data to make optimal decisions about the clients' targeted advertising strategy. The data coupled with artificial intelligence capabilities has helped improve the company's product offerings, which in turn attracts more ad buyers. This virtuous cycle has created a strong network effect for the company.
The Trade Desk's stock has a high valuation
The big downside of this company's investment thesis at the moment is its high valuation. The Trade Desk stock trades at 63.4 times earnings, much higher than the U.S. tech sector average of 32.7.
However, The Trade Desk has been GAAP profitable for the past several years, which is not common for a high-growth tech company. The company also has a robust balance sheet with cash of $1.21 billion cash and debt of only $267.6 million. So while we can expect some share price volatility going forward due to macroeconomic pressures, this leading ad tech company's strong business model and robust financials make it an amazing buy for long-term investors even at the current elevated valuation levels.
