Unlike some tech companies, The Trade Desk's (TTD 1.54%) business is full-steam ahead. Yet its stock is trading down significantly alongside many of its peers. Finding opportunities like this where the stock performance disconnects from the business performance is critical for long-term investors, as it gives them great entry points.
With The Trade Desk, investors need to take advantage of these opportunities as they arise. Here's why now is an excellent chance to take a position in this growth stock.
Ad tech, not advertising
The Trade Desk is in the advertising business but isn't directly involved as a buyer or seller. Instead, its ad-tech platform gives ad buyers the tools to place their ads in the most suitable spot, whether connected TV, podcast audio, or on a website.
The Trade Desk is more insulated from the ups and downs of the advertising cycle because it operates in the ad-tech business. Advertising budgets are often cut when the economy slows, making ad space less valuable since supply is high but demand is low. However, because the company's software is purchased on a subscription basis, it's better insulated from these fluctuations.
This makes The Trade Desk a great company to invest in, especially with the ever-growing advertising opportunities outside the U.S. In 2021, 86% of the company's revenue originated in the U.S., but 67% of all advertising dollars were spent outside the U.S. Furthermore, traditional advertising mediums, like linear TV, are being replaced by connected TV, increasing The Trade Desk's market opportunity.
This great business model translates into solid financials. That was evidenced by how The Trade Desk performed in the third quarter.
Strong growth, but an absurd CEO pay package
Q3 revenue for The Trade Desk was up 31% year over year to $395 million. It also posted a $16 million GAAP profit -- a 4% margin. While this margin isn't overly impressive, it is positive, which is something many tech companies aren't producing at the moment.
One item that's negatively weighing on this metric is CEO and co-founder Jeff Green's large pay package. It's mostly in stock options and is heavily tied to hitting different goals, such as stock price performance in relation to other companies in the Nasdaq-100. As of Sept. 30, The Trade Desk issued an astounding $197 million in optioned shares to Green year to date. The total compensation plan will pay out $828 million if the stock hits the goals the company has set.
I think the compensation package he receives is absurd. I also suspect some potential investors are turned off by it as well. If it's any consolation, Green pledged to give away 90% of his wealth before or at the time of death. In my view, taking an absurd compensation package only to give most of it away feels like shareholder theft.
If The Trade Desk continues to perform well and further expands its market opportunity, the business growth will easily cover the compensation package. That's part of why I'm a believer in the business and remain an investor in the stock despite my reservations about the compensation. At least the pay package has interest alignment. If the stock significantly rises in price, both Green and the shareholder benefit. That kind of skin in the game offers some confidence that Green will do what's best for the business over the long run.
As for the stock's valuation, it isn't terribly expensive, considering its growth. Its 16 times sales price tag is a bit elevated, but at 49 times free cash flow, the valuation is more palatable.
TTD PS Ratio data by YCharts.
That's not to say the stock valuation is cheap -- it's still quite expensive, compared to a mature company. But the Trade Desk is far from a mature business, and the stock has a long way to run. The company also gave solid Q4 guidance, which indicated revenue growth of at least 24% year over year.
The Trade Desk's software is recession-resistant and primed for outsized growth during periods of economic expansion. With the stock trading down significantly from its all-time high, now is a great time to open a position.
