Many investors are hesitant to buy growth stocks in this market. After all, the Nasdaq is down more than 25% this year, and a recession is on the horizon. It's natural for people to want to buy while the market is rising and get out when it falls. But multiple studies show that market timing is a money-losing strategy.
First, timing the market is akin to gambling in my neck of the woods -- Las Vegas. Did you know that the market's best days tend to occur within just a few weeks of the market's worst days? It's true! The market also tends to bottom well before the economy does, so an upcoming recession doesn't necessarily mean stocks will get cheaper (although they could, so dollar-cost averaging is highly recommended).
Long-term investors are better served by looking for companies with compelling products, massive growth, and proven cash flow -- and then building a position while the stock is down and holding long-term. The Trade Desk (TTD 3.35%) fits this model to a T.
The stock has had a rough go in 2022 and still trades much closer to its 52-week low than its high, as shown below.
As we can see, even after its recent rise, the stock is 44% off its 52-week high. Looking at the chart below, it also trades at the lowest price-to-sales (P/S) ratio since the March 2020 crash and is lower than it traded prior to the tech bubble.
TTD PS Ratio data by YCharts.
With all of that in mind, let's look more closely at what this company brings to the table.
What does The Trade Desk do?
How people consume media has changed, and advertisers now must reach them via mobile, display, online video, and connected television. Doing this efficiently, effectively, and with visibility of key performance indicators is quite a challenge, and The Trade Desk's platform makes it possible.
The cloud-based platform provides advertisers and agencies with billions of digital ad opportunities daily, an easy-to-use interface, and tons of data to reach a targeted audience. It's important to note that The Trade Desk isn't trying to replace advertising agencies. Instead, it's working directly with them to improve results.
So when Lexus, owned by Toyota Motor (NYSE: TM), wanted specifically to reach a younger audience through streaming television, or when Unilever (NYSE: UL) wanted to reach a highly targeted demographic, they turned to The Trade Desk.
Impressive financial results
Unlike many other growth companies, the Trade Desk has been profitable for years. It also produces positive cash from operations ($375 million through Q3), keeping the balance sheet healthy. In the last report, the company has no long-term debt and has $1.3 billion in cash and short-term investments on hand.
Of course, the big story is the sensational revenue growth, as shown below.
Data source: The Trade Desk. Chart by author.
This year's growth in the face of a challenging advertising market is impressive. Just as important, the company has a 95% customer retention rate going back eight years -- they clearly love the product. As advertisers look closely at budgets next year, The Trade Desk's targeted approach will be extremely attractive.
Every market downturn is different, although we can draw clues from history. And history tells us that predicting short-term price movements is a money-losing proposition for investors. Build positions over time and with an eye on the future instead. There are still tremendous bargains to be had as 2022 draws to a close, and The Trade Desk looks like one of them.
