What happened
Shares of The Trade Desk (TTD -0.40%) climbed 10.4% in February after the company delivered a strong quarterly report. The adtech leader modestly outperformed Wall Street's revenue and earnings expectations, and some bullish commentary from CEO Jeff Green helped to relieve investors' fears about the state of the digital advertising industry.
So what
In the fourth-quarter report The Trade Desk released on Feb. 15, it boasted 24% year-over-year revenue growth and 27% higher operating profits. These figures weren't particularly surprising to investors, but they suggest that the company is significantly outperforming its digital advertising peers. The Trade Desk's management team confirmed that during the quarterly conference call by asserting that the company is gaining market share. The company's strong performance was attributed to its presence in the streaming television market, along with its response to challenges in the digital marketing industry.
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There's been a cloud hanging over digital advertising stocks such as Alphabet (NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Snap (NYSE: SNAP). Consumers have become more sensitive to abuses of their personal data, and some major consumer tech companies have taken steps to enhance users' data privacy. That made it more difficult for third-party businesses to collect and sell people's data for marketing purposes, and that has taken a toll on the prices of stocks throughout the industry. In this environment, The Trade Desk's strong results really stand out.
Now what
The Trade Desk is navigating difficult conditions to deliver excellent growth and market-share gains, and it still managed to produce nearly $450 million in free cash flow last year. Those are promising signals that should excite growth investors.
However, there are still clear risks in this story. The Trade Desk has formidable competitors, some of which operate at much larger scales. That means that the company will have to continue investing heavily in product development indefinitely, and it could also result in price competition down the road. Both of those factors decrease cash flows.
Investors should also consider the company's momentum associated with streaming content. While the prevalence of streaming is likely to grow, there are early rumblings that the streaming video provider market is already over-saturated. If the number of streaming platforms drops through consolidation or attrition, it could impact advertising economics in that industry. It's hard to predict exactly what will happen in the streaming world, but any shake-up would create uncertainty and could impact The Trade Desk's top line. That is another potential threat to share prices.
With a forward price-to-earnings ratio above 50, the stock is susceptible to large drops. That susceptibility was on display earlier this month as growth stocks were pummeled due to interest rate concerns, dragging The Trade Desk lower without any company-specific reason. The company's share price is likely to remain volatile in the near term, so investors buying the stock should be in it for the long haul.
