Imagine a company selling pet insurance that's determined to launch an effective and efficient advertising campaign. In the past, there were limited options, mainly broadcast television and print. These ads can be effective but expensive and inefficient (they reach tons of people who don't own pets). The Trade Desk (TTD -4.34%) has a solution.
Nowadays, marketers also need an omnichannel approach that utilizes the following:
- Connected television and video (CTV) -- ads that run on streaming services or before, during, or after video content
- Mobile -- such as banner ads on a mobile website
- Display -- ads that appear on websites
- Other mediums
It's a lot to sift through. Luckily, The Trade Desk's platform makes it simple to reach them all. Let's take a few minutes to get to know The Trade Desk.
1. What does The Trade Desk do?
The Trade Desk provides advertisers and their ad agencies with a cloud-based platform enabling them to bid on billions of online advertising opportunities daily. The interface simplifies and automates the complicated process and provides a wealth of data to maximize and measure effectiveness.
In our example above, the company needs to target pet owners. The Trade Desk enables the company to do just that across various media.
The Trade Desk is also a pioneer in shopper marketing, or brands that market their products through retailers' mobile apps and in-store displays. It partnered with Walmart to create Walmart Connect and has partnerships with Albertsons, Target, Walgreens, and others.
The Trade Desk is a partner to advertising agencies, not a replacement. Rather than seeking to displace them, it works in tandem to maximize effectiveness.
2. Biggest growth drivers
CTV, shopper marketing, and international expansion are areas for investors to watch. After being ad-free for years, Netflix and Disney+ have launched tiered subscription packages that include lower-cost ad-supported plans. These are a couple of the last dominoes to drop as streaming services realize that ads are critical to profits.
The Trade Desk founder and CEO Jeff Green predicted this and set the company up for success. It currently has a reach of 90 million households and 120 million CTV devices, which should continue to increase, making this fertile ground for growth.
Green said during the Q3 2022 earnings call that 80% of the largest retailers in the U.S. now partner with The Trade Desk and shopper marketing ad spending leaped 300% from Q2 to Q3. There's enormous potential here.
International expansion has been slow, compared to U.S. sales growth, but it's a massive, untapped market. The international portion of total sales increased from 6.5% in 2015 to 14% in 2021. These sales make up just 12% through Q3 2022 because of economic challenges, like lockdowns in China. Management is focused on increasing sales abroad.
3. Booming sales expansion
The Trade Desk's rapid revenue growth proves that advertisers see immense value in the business. Top-line sales have grown at a compound annual growth rate of over 55% since 2014, as shown below.
Data source: The Trade Desk. Chart by author.
The percentage growth rate is slowing (32% expected in 2022) as the numbers get larger, but 2022 will be the largest dollar increase in sales, ever. Management is guiding for $381 million more than last year.
4. Profits, cash flow, and a strong balance sheet
Growth companies often struggle with cash flow in their early stages. This can mean financing growth with debt -- but not for The Trade Desk. The business produces terrific cash from operations -- $539 million on a 36% margin over the trailing 12 months (TTM) -- allowing it to operate unburdened by long-term debt, as shown below.
TTD Cash from Operations (TTM) data by YCharts.
The company has $1.3 billion in cash and investments to fund operations and growth. It also separates itself from the growth-stock pack by being GAAP profitable over the years, although not significantly so.
It's still a growth stock, after all, but it isn't posting massive losses, as many do. This compelling financial picture is excellent news for long-term investors.
5. The stock's incredible potential
The Trade Desk stock exploded in 2020 and 2021, crashing back to Earth in 2022, like many growth stocks.
The stock may have overcorrected. It trades at a price-to-sales ratio (P/S) of around 15, which is well below where it traded for most of 2019 and 2020, before the pandemic crash and growth-stock bubble.
The Trade Desk increased sales by 32% in 2022. If the company's growth slowed to 30% next year and 25% in the following years, it would still produce more than $5 billion in annual sales within five years. At today's sales multiple, it would have a market cap of $75 billion -- more than 320% higher than the $23 billion market cap today.
No one knows which growth stocks will succeed, but The Trade Desk's results and potential are encouraging. Investors should always consider an approach like dollar-cost averaging to mitigate risk. If you're interested in growth stocks with outstanding leadership, fantastic results, and loads of potential, consider owning a piece of The Trade Desk.
