Leading demand-side programmatic-advertising player The Trade Desk (TTD 3.24%) managed to surpass consensus revenue and earnings estimates in the third quarter (ending Sept. 30, 2022). That's an impressive feat, considering the slowdown in the advertising industry. While the revenue guidance of at least $490 million and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance of at least $229 million for the fourth quarter is lower than analysts' expectations, it still implies a healthy sequential revenue and adjusted EBITDA growth rate of 24% and 40.5%, respectively.
Despite the stellar numbers, the stock has declined by 44% so far this year. Investors have been shying away from advertising stocks since corporate marketing budgets (including advertising) are the first to be cut during economic slowdowns. The controversy surrounding founder and CEO Jeff Green's stock-based compensation ($830 million in 2021 and $197 million so far this year) is also not helping instill confidence in the investor community.
The burning question: Is The Trade Desk an attractive investment now? Let's assess.
NASDAQ: TTD
Key Data Points
Market-share gains
The Trade Desk gained market share rapidly in the first nine months of 2022, despite the volatile macroeconomic environment. This occurred thanks to its focus on transparency and objectivity, unlike other walled gardens such as Meta Platforms' Facebook and Alphabet's Google, which own content and are subject to a conflict of interest while monetizing their ad spaces.
In the absence of any conflict of interest, marketers and advertisers are better able to trust the company. Further, the Trade Desk's focus on data-driven advertising enables advertisers to make the most optimal decisions for their advertising budgets, which becomes quite important during periods of economic turmoil.
The Trade Desk has reported robust growth across industry verticals and advertising channels, such as CTV, mobile, and retail media in 2022. The company is also boasting a solid customer-retention rate of 95% for the past eight consecutive years.
UID 2.0 adoption trends
The Trade Desk has developed an open-source ID framework, Unified ID 2.0 (UID 2.0), which leverages the power of advertisers' first-party data to help them know who's watching their advertisements. After giving it to an independent consortium, the company is now seeing increasing adoption of UID 2.0 by content publishers, advertisers, prominent connected television (CTV) players such as fuboTV and Disney, as well as data aggregators such as Amazon, Snowflake, Salesforce, and Adobe. MediaMath, a leading independent demand-side platform with a client base of over 3,500 advertisers, supports UID 2.0.
With UID 2.0 now having more than 600 partners, CEO Jeff Green believes that over half of the data on its platform will be UID 2.0 tagged by 2023. This will enable the company to continue offering targeted advertising solutions to advertisers, even without the use of cookies.
CTV opportunity
Video, which includes CTV, accounted for a percentage share in the low 40s of The Trade Desk's total business at the end of the third quarter. CTV is also the company's fastest-growing business, thanks to the Trade Desk providing a range of ad optimization tools to advertisers and forging close partnerships with almost all the premium CTV providers in the world. Hence, while North America remained the biggest market for CTV advertising, the company is also seeing rapid growth in international markets, such as Southeast Asia and Europe.
With streaming players coming out with new digital inventory, some of which include ad-supported tiers, The Trade Desk expects CTV advertising to continue to be a major growth driver in 2023.
Is The Trade Desk a buy?
The Trade Desk is currently trading at 16 times sales, the lowest valuation since March 2020. Yet the company trades at a premium to peers such as Alphabet and Meta Platforms, which are trading at price-to-sales multiples of 4.8x and 2.8x, respectively.
While the current advertising slowdown had an adverse impact on the majority of advertising technology players (revenue contraction or growth in the single-digit range in the third quarter), The Trade Desk managed to grow revenues by 31%. Besides CTV, retail media is also emerging as a promising opportunity for the company. The Trade Desk has partnered with over 80% of the largest retailers in the U.S., many of whom are also providing access to their first-party data.
The Trade Desk seems to be one of the few companies capable of performing well both in good times and bad ones. Hence, despite the rich valuation, the company seems to be an attractive pick in the current uncertain macroeconomic environment.
