Demand-side advertising platform The Trade Desk (TTD 4.15%) reported financial results for the third quarter of 2022 on Wednesday morning and managed to buck a troubling trend. While most advertisers are struggling with the looming possibility of a global recession, The Trade Desk is growing at a healthy clip.
In the conference call with analysts to discuss Q3 results, founder and CEO Jeff Green said, "I believe that through the first nine months of the year, we have gained more market share ... than at any point in our history." And that's a big statement worth examining.
Gaining market share in the ad space
The Trade Desk went public six years ago and has crushed the S&P 500 during this time; it's up over 1,300%. Moreover, the company was only founded in 2009, yet it has already scaled to nearly $1.5 billion in trailing-12-month revenue. Simply put, it entered the ad space and quickly took market share.
In Q3, The Trade Desk generated revenue of $395 million, up 31% year over year (YOY). To be clear, this was a marked deceleration in growth as first-quarter revenue was up 43% YOY and second-quarter revenue was up 35%.
Perhaps more troubling for some investors was The Trade Desk's fourth-quarter guidance. Management is guiding for Q4 revenue of "at least" $490 million, which would be an increase of only 24% from the fourth quarter of 2021.
Here's the thing: While the growth rate is slowing, the company's market share gains while the overall industry slows are more meaningful. Consider that according to a recent survey by the World Federation of Advertisers, 40% of companies are just maintaining their marketing budgets for 2023, not increasing them. Another 29% are lowering their budgets. And 75% say they're scrutinizing their spending.
This pullback in advertising spend is seen throughout the financial results of public companies. For example, connected-TV (CTV) platform company Roku generated most of its third-quarter revenue from displaying ads to its users. But Q3 revenue was up only 12% YOY, and it expects a decline in revenue in the current quarter.
In its letter to shareholders, Roku's management said, "As we enter the holiday season, we expect the macro environment to further pressure consumer discretionary spend and degrade advertising budgets." This echoes sentiment from Rajeev Goel, co-founder and CEO of supply-side ad-tech platform PubMatic, who said, "As we suspected, Q3 marked an inflection point with respect to a deteriorating economic environment."
PubMatic's Q3 revenue was up only 11% YOY to $64.5 million. And revenue this quarter is expected to be flat.
Coming back to The Trade Desk, ongoing growth at this rate, at this scale, and in these macroeconomic conditions truly makes this a standout company in its industry.
Is the stock a buy?
Gaining market share during adverse economic conditions is a testament to the strength of The Trade Desk's business and serves as a solid foundation for a long-term investment thesis -- a simple explanation for why the stock can go up. However, there's more to building a thesis than this.
There are potential risks involved in an investment in The Trade Desk. First, the company is involved in programmatic advertising, which allows brands to quickly change their advertising strategies. But this can work against The Trade Desk at times. As Green said at the outset of the COVID-19 pandemic, "Programmatic advertising is easy to just switch off when you have to very rapidly take stock of a changing environment."
If the global economy worsens, The Trade Desk's revenue could plunge as brands flip the switch off. And that would be particularly problematic here. In Q3, The Trade Desk's operating expenses were up a whopping 66% YOY. And operating expenses year to date (YTD) are up 65% compared to just 32% YTD revenue growth. As the chart below shows, this is a recent trend.
TTD Revenue (TTM) data by YCharts
In short, The Trade Desk is scaling up, anticipating growth. But if the global economy sours, the company could be left with steep losses. Couple this reality with a premium price-to-sales valuation of about 15, and there's room for the stock to drop if the going gets rough.
However, its performance so far in 2022 -- and in Q3 specifically -- demonstrates that The Trade Desk is a leader in the digital-ad space. And as a leader, it might be expected to continue capturing a larger share of a market the company estimates is worth a massive $816 billion. There are risks to any investment, but beyond nearer-term macroeconomic uncertainty, The Trade Desk is a stock worth owning for the coming decade.
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