The Trade Desk (TTD -1.25%) posted a strong third-quarter earnings report on Nov. 9. The ad tech company's revenue rose 31% year over year to $395 million, which beat analysts' estimates by $8 million. Its adjusted net income improved 45% to $129 million, or $0.26 per share, which also cleared the consensus forecast by three cents.

Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 33% to $163 million, which boosted its adjusted EBITDA margin four percentage points sequentially and two percentage points year over year to 41%. The Trade Desk's stock rallied in response to those impressive headline numbers, but it still remains down more than 40% for the year.

Should investors capitalize on that pullback and accumulate more shares of this growth stock today?

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Image source: Getty Images.

Why The Trade Desk continues to grow

The Trade Desk operates the world's largest independent demand-side platform (DSP) for digital ads. DSPs enable ad agencies, advertisers, and trade desks to bid on programmatic ads. They sit at the opposite end of the ad supply chain as sell-side platforms (SSPs) like Magnite (MGNI -2.61%), which help publishers sell their own ad inventories.

Advertising giants like Alphabet's (GOOG 0.07%) (GOOGL 0.04%) Google often bundle together DSPs, SSPs, and other advertising services in walled gardens. However, companies that don't want to tether themselves to those sticky and sprawling ecosystems -- especially those that directly compete against tech giants like Google in other markets -- often prefer to buy or sell their ads through independent platforms like The Trade Desk or Magnite.

The Trade Desk expects three main catalysts to propel its near-term growth: the adoption of Solimar, its new AI-powered platform to collect and analyze more first-party data for advertisers; OpenPath, a new feature that bypasses SSPs altogether and directly connects publishers to advertisers; and the ongoing expansion of the connected TV (CTV) advertising market as more streaming media platforms launch ad-supported tiers.

The Trade Desk's core business is still firing on all cylinders

The Trade Desk's revenue grew 26% in 2020 as pandemic-stricken companies purchased fewer ads. But its revenue surged 43% to $1.2 billion in 2021 as those headwinds dissipated. Its growth in revenue and adjusted EBITDA has also remained incredibly resilient over the past year, even as Google, Meta Platforms (META 0.71%), and other advertising giants grappled with inflation, competition, and Apple's (AAPL -0.02%) privacy changes on iOS.

Metric

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Revenue Growth (YOY)

39%

24%

43%

35%

31%

Adj. EBITDA Growth (YOY)

59%

25%

70%

18%

33%

Adj. EBITDA Margin

39%

48%

38%

37%

41%

Data source: The Trade Desk. YOY = Year over year.

The Trade Desk resisted those headwinds for three simple reasons. First, its emphasis on gathering first-party data with its Unified ID Solution 2.0 initiative (which replaces third-party tracking cookies) and Solimar largely insulates it from Apple's privacy changes on iOS and Google's planned elimination of third-party cookies on Chrome.

Second, its platform continues to attract advertisers that don't want to lock themselves into the walled gardens at Google, Meta, and other advertising behemoths. Lastly, the CTV advertising market -- which it's heavily invested in -- continues to expand and gradually reduce its dependence on the saturated desktop and mobile advertising markets.

During the latest conference call, CEO Jeff Green said that "under the current operating conditions, we are significantly outpacing the market regardless of the macro environment." For the fourth quarter, it expects its revenue to rise "at least" 24% year over year to $490 million, and for its adjusted EBITDA to grow 20% to $229 million -- which implies its adjusted EBITDA margin will rise by six percentage points sequentially (but dip by a percentage point year over year) to 47%.

Is it the right time to buy The Trade Desk?

That fourth-quarter forecast suggests the company's revenue will rise 32% in 2022 as its adjusted EBITDA grows 30%. For 2023, analysts expect its revenue and adjusted EBITDA to increase 21% and 12%, respectively. Those forecasts seem easily achievable, considering how resilient The Trade Desk remained throughout the macro volatility over the past year. 

The Trade Desk's near-term prospects look bright, but its stock also isn't cheap at 13 times next year's sales and 34 times its adjusted EBITDA. By comparison, Magnite -- which is growing a bit slower than The Trade Desk, but benefits from the same CTV tailwinds -- trades at less than 3 times next year's sales and 8 times its adjusted EBITDA. Therefore, The Trade Desk is reasonably valued (but not undervalued) relative to its growth rates. I believe it's still worth buying as a long-term play on the advertising market, but investors shouldn't expect it to surpass its all-time high from last November anytime soon.