Since its IPO in 2016, The Trade Desk (TTD 4.15%) has turned every $100 invested into nearly $1,500. With that kind of performance behind it, some may wonder if it has anything left in the tank. After all, the shares are down over 50% this year.
However, despite the stock gyrations, The Trade Desk has a lot of room left to grow. And while it probably won't rise another 1,400% from here (that would make it a $300 billion company), it still has phenomenal upside. So let's look at The Trade Desk's prospects and see if now is a great time to establish a position in the stock.
Targeted advertising is The Trade Desk's specialty
The Trade Desk's software has become essential in the advertising world. The buy-side platform allows an ad purchaser (like a beverage or clothing company) to target consumers accurately. While some people believe this is an invasion of privacy, proponents argue that a fully customized ad environment increases the user experience.
One of The Trade Desk's biggest growth verticals is connected TV. With the world switching away from linear television to streaming, it opens up the possibility of targeted commercials. However, getting accurate data on what commercials will yield the best results is difficult on TVs because tracking cookies on devices that inform businesses like The Trade Desk don't work well when you switch devices.
Fortunately, The Trade Desk has developed its own tracking method, improving accuracy and privacy problems. Unified ID 2.0 (UID2) is an open-source technology that converts an email address to an anonymous ID, allowing The Trade Desk to attach relevant advertising information to that ID. It can then use it across all devices (including streaming TV) to target advertisements to the viewer wherever they log in, making this the technology of the future.
The deployment of this technology is in its infancy, giving The Trade Desk a massive growth runway. This alone makes The Trade Desk investible, but the financials also need to be in great shape to make it a good investment.
The Trade Desk's CEO makes what?
Even though the broader advertising market is having a challenging year, customers have still been increasing their usage of The Trade Desk's product. Revenue grew 31% to $395 million in the third quarter, resulting in a $16 million profit.
Throughout 2022, The Trade Desk has been compensating its CEO and founder Jeff Green heavily with a one-time stock bonus, causing profits to drop significantly. In a pay package outlined in 2021, Jeff Green will make $835 million over 10 years if he accomplishes specific long-term goals.
So far in 2022, he's raked in $197 million, including $66 million in Q3 alone. This grant should slow significantly next year, but it's something investors should keep an eye on. Green is receiving this pay in stock, so he will succeed if the company does.
If you strip out this stock grant from operating expenses, it still rose 36% in Q3 -- faster than revenue did. This trend has pretty much been consistent among most tech companies in Q3. But that shouldn't be an excuse. I'd like to see The Trade Desk separate itself from the pack with responsible expense growth.
Analysts project 20% revenue growth next year and for earnings per share to more than double, so it will likely get back on track next year with its expenses.
The Trade Desk has some items to watch on its financial side, particularly in expenses. Additionally, it trades at nearly 15 times sales, which is a bit pricey compared to most software stocks. To keep its premium valuation, The Trade Desk must continue executing at a high level. If it doesn't, the stock could see some more pain ahead.
While The Trade Desk has some short-term financial and valuation risks, I think the long-term prospects of its industry are just too great to ignore. While you may be able to eke out a lower price by waiting around, you may also miss a sizable recovery. The future is still bright for The Trade Desk, and I think it's one of the best buys in today's market.
