This year has been tough for technology companies. Tech giants like Meta Platforms, Shopify, and Amazon all reported materially weaker performances in recent quarters (compared to last year) due to the headwinds from high inflation, supply chain issues, rising interest rates, and geopolitical tensions, among others.
Amid that broad slump for tech, The Trade Desk (TTD -0.34%) defied gravity, and its revenue grew by 31% in the third quarter. Impressed with that top-line result, I studied the company and found more reasons to like it. So much so that I added the stock to my watch list.
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A world-class track record of execution
The Trade Desk offers a platform that agencies, brands, and large companies can use to automatically buy targeted advertising. Powered by a vast trove of data it has accumulated over the years, this demand-side programmatic advertising platform helps advertisers reach the right audiences at the right time and places.
Using The Trade Desk's platform gives those advertisers better outcomes and helps them maximize the value of their advertising budgets. Its clients gain access to almost all digital (and non-digital) advertising channels, including connected TV, online video, mobile, audio, display, and more.
By helping its customers achieve more with less, The Trade Desk gained their trust and loyalty -- which explains its high customer retention rate of more than 95% over the last eight years. A happy and loyal customer cohort, in turn, propelled the company's strong financial performance.
From 2015 to 2021, its revenue grew more than tenfold from $114 million to $1.2 billion as advertising spending on the platform surged from $552 million to $6.2 billion. And while profitability is rare among young, hyper-growth technology companies, The Trade Desk has been profitable since 2013.
The Trade Desk has massive growth prospects
The Trade Desk has done well in growing its business over the last few years. Yet despite its successes, the adtech company has just scratched the surface of its potential opportunities.
Global ad spending is massive, estimated at $816 billion in 2022. and growing. With $6.2 billion in ad spending in 2021, The Trade Desk was involved in less than 1% of those sales. Suffice it to say that the sky is the limit for the company.
The Trade Desk focuses on key growth areas such as marketing geared toward shoppers, connected TV, and global markets to grow its business in the years to come.
Consider this. Roku -- the leading platform in connected TV and a partner to The Trade Desk-- added close to 9 million new active accounts in 2021, bringing its total active accounts to 60 million. Roku also grew its customer streaming hours by roughly 20% year-over-year, creating enormous opportunities for advertisers to carry up personalized advertising.
In addition, The Trade Desk's decision to grow overseas makes a lot of sense. The company generated 86% of its 2021 revenue in North America, but that region only accounted for 33% of global ad spending in 2021. Going global significantly expands the company's target addressable market.
Moreover, with economies around the world getting rocky, companies are tightening their belts on their expenses. But that just makes The Trade Desk's programmatic ad service even more compelling, as it helps companies get more out of their smaller ad budgets. It won't surprise me if the ad-tech company sustains its high growth rate by gaining market share in the coming quarters.
But The Trade Desk's stock is too pricey
A solid history of execution and a huge growth runway are two attributes investors love to see in a growth company. And usually, based on the positives discussed above, I would have already bought some shares in a company like The Trade Desk.
But here's the thing. As much as I like to invest in companies that can grow over time, I also try to buy stocks when they are trading at reasonable valuations. Doing so provides me with a margin of safety and potentially increases my long-term investment returns.
Unfortunately, The Trade Desk's stock price is anything but reasonable. At the time of writing, it has a price-to-sales ratio of 15.3 and a price-to-earnings ratio of 868.6. By way of comparison, Alphabet has a price-to-sales ratio of 4.6 and a price-to-earnings ratio of 18.
It is not surprising that The Trade Desk is trading at higher valuations, given its higher growth rate and much smaller size. But does it deserve such a high premium? I don't think so. That's why I'm keeping The Trade Desk on my watch list until (and unless) the price becomes more palatable.
