The massive global advertising industry is still expanding, and digital ads are gobbling up market share. However, a number of snags held up progress this year. Amidst heightened economic uncertainty, many brands are tapping the brakes on marketing. And Apple's privacy updates -- which allow users to opt out of app activity tracking -- have lowered the value of digital ads on the lucrative iOS operating system.
Nevertheless, digital advertising technology will continue to advance for many years to come. Two particular standouts this year that are shaking off industry woes are The Trade Desk (TTD -0.54%) and DoubleVerify (DV -2.11%). Here's why they're both a great buy right now.
The Trade Desk: Really in a league all its own
The Trade Desk has been a best-in-class player in the advertising ecosystem for years. A demand-side platform that helps marketers purchase ads from publishers, the company champions the "open internet." It doesn't compete with its customers in the way that Alphabet's Google and other internet and media conglomerates do.
In addition, many of its ad marketplace and software solutions are open source, allowing marketing agencies and the brands they represent to build their own proprietary systems atop The Trade Desk's platform.
The company's strategy is showing its merits via financial outperformance. While many ad software companies have been hit hard in 2022, The Trade Desk is still going strong. Revenue in Q3 was up 31% year over year, compounding the 39% year-over-year increase in the same period of 2021.
Granted, not all was perfect. Stock-based compensation has jumped significantly this year, particularly surrounding executive pay packages. Stock-based comp was a drag on earnings per share (EPS) last quarter as it totaled $121 million (compared to $34.5 million last year). Resulting EPS was $0.03, down from $0.12 a year prior.
Nevertheless, The Trade Desk remains highly profitable. Free cash flow has been a robust $339 million so far in 2022, good for a very healthy free cash flow profit margin of 31%. And the balance sheet remains in tip-top condition as well, with $1.32 billion in cash and short-term investments and zero debt as of the end of September.
Shares trade for a premium 52 times trailing-12-month free cash flow as of this writing, but the premium is deserved in my opinion, given The Trade Desk's resilient growth story.
DoubleVerify: High growth and high profit
DoubleVerify is a unique play on the digital ad industry. Most stocks in this space represent ownership of either a buy-side (like The Trade Desk) or a sell-side platform (which works with publishers, such as Magnite). But DoubleVerify is neither. Instead, it's a subscription software-as-a-service (SaaS) business that provides ad measurement and analytics tools for brands and agencies.
The shares fell sharply through the first half of 2022, which is not surprising considering this is still a fresh IPO stock (from early 2021) and given that the bear market has been especially hard on high-growth tech companies. But DoubleVerify seems to have found a bottom as shares have been rallying in the second half of this year. At times, the stock has even been outperforming the S&P 500 so far in 2022.
That outperformance is for good reason, too, as the Q3 earnings update demonstrated. Revenue was up 35% year over year to $112 million in spite of weakness in some areas of its software suite as ad activity pulled back -- especially in Europe, where war and an energy crisis are weighing on that region. Net income was up 30% to $10.3 million though EPS was up only 20% due to dilution from stock-based compensation ($31 million through the first nine months of 2022).
Nevertheless, even at this early stage of its existence, DoubleVerify has proven it can be a highly profitable business. Free cash flow has dipped this year as the company invests in new capabilities for its software suite ($30.7 million compared to $52.9 million last year), but the net income increase is impressive. Many small software businesses have been punished by the bear market due to their complete inability to turn the corner from loss-generating to cash-positive operations.
The shares trade for 86 times trailing-12-month earnings and about 32 times trailing-12-month free cash flow. Again, it's a premium price, but DoubleVerify has earned it given its solid growth and positive progress on profits in the face of a difficult economic environment. I continue to nibble on shares of DoubleVerify and The Trade Desk after both companies' Q3 earnings updates.
