The Trade Desk's (TTD 2.57%) stock surged 33% on Feb. 15 after it posted its fourth-quarter earnings report. The advertising technology company's revenue rose 24% year over year to $491 million, which narrowly missed analysts' estimates by $1 million. But its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 28% to $245 million, or $0.38 per share, and cleared the consensus forecast by two cents.
For the full year, its revenue rose 32% to $1.58 billion as its adjusted EBITDA grew 33% to $668 million. Those robust growth rates suggested it was well-insulated from the macro headwinds, but is its stock still worth buying after its post-earnings pop?
Image source: Getty Images.
What does The Trade Desk do?
The Trade Desk is the world's largest independent demand-side platform (DSP) for digital ads. DSPs enable advertisers to bid on programmatic ad space across desktop, mobile, and connected TV (CTV) platforms. They work in tandem with sell-side platforms (SSPs) like Magnite (MGNI +1.40%), which help publishers sell their own ad inventories.
Diversified advertising giants like Alphabet's (GOOG 0.21%) (GOOGL 0.41%) Google and Meta Platforms (META +0.22%) bundle together DSPs, SSPs, and other services for both advertisers and publishers. However, many companies don't want to lock themselves into those larger tech ecosystems, especially if they consider them to be competitors in certain markets or want to reach customers on a wider range of platforms.
That's why many advertisers prefer to use independent DSPs like The Trade Desk to buy ad space across the "open" internet that isn't corralled within the walled gardens of tech giants like Google and Meta. The Trade Desk also generates most of its growth from the CTV market, which has been expanding rapidly in recent years as streaming video platforms replace linear TV services like cable, network, and satellite TV.
NASDAQ: TTD
Key Data Points
Many advertising platforms, including Meta's Facebook and Instagram, struggled over the past year after Apple (AAPL 0.01%) allowed its iOS users to opt out of data tracking features.
That signal loss made The Trade Desk even more appealing, since its artificial intelligence-driven Solimar platform structures its bids on first-party data -- which is insulated from Apple's platform changes -- instead of accumulating third-party data from individual users. It's also rolling out Unified ID 2.0 (UID2), a new first-party data tracking format which replaces third-party tracking cookies across the internet. It claims UID2 could be ten times more valuable than cookies over the long term.
Why is The Trade Desk resistant to the macro headwinds?
The Trade Desk's year-over-year revenue growth decelerated over the past three quarters as the macro headwinds caused some companies to rein in their ad spending, but its adjusted EBITDA margins still expanded as it carefully managed its headcount and operating expenses.
|
Period |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
24% |
43% |
35% |
31% |
24% |
|
Adjusted EBITDA growth (YOY) |
25% |
70% |
18% |
33% |
28% |
|
Adjusted EBITDA margin |
48% |
38% |
37% |
41% |
50% |
Data source: The Trade Desk. YOY = Year-over-year.
During the fourth-quarter conference call, CEO Jeff Green said that according to Dentsu, global ad spending only rose 8% in 2022. However, Green noted that spending on The Trade Desk "grew more than three times" faster than that in 2022, which marked the company's highest level of industry outperformance in its six years as a public company. Green noted that as other marketers face "pressure to do more with less," The Trade Desk continued to "outperform and gain share."
Specifically, Green believes that as advertisers reevaluate their marketing budgets, they're allocating more spending on the "open internet" instead of in Google's and Meta's walled ecosystems -- and ad-supported CTV platforms are an attractive option in this tough market. In a thinly veiled dig against Google's YouTube, Green said a lot of the industry's growth was "happening outside the walled gardens as advertisers shift spend from user-generated content to premium streaming content."
Can The Trade Desk maintain that momentum?
In the first quarter of 2023, The Trade Desk expects its revenue to rise "at least" 15% year over year to $363 million as its adjusted EBITDA declines 36% to $78 million. During the call, CFO Blake Grayson attributed that near-term profit decline to its increased investments in its ecosystem and the ongoing expansion of its workforce -- although it plans to increase its headcount in 2023 at only "half the rate" of its expansion in 2022.
For the full year, analysts expect The Trade Desk's revenue to rise 20% to $1.89 billion as its adjusted EBITDA increases 8% to $721 million. Those growth rates are rock-solid, but its stock isn't cheap at 16 times this year's sales and 43 times its adjusted EBITDA. Magnite, which will benefit from the same open internet and CTV trends on the opposite end of the advertising supply chain, trades at just four times its 2023 sales and 12 times its adjusted EBITDA.
Therefore, my advice is the same as it was in previous quarters: Investors can gradually accumulate shares of The Trade Desk at these levels, but they should be aware that its premium valuation could limit its near-term gains.
