The advertising industry has come a long way since billboards and newspaper sections. While that may have been the best way to reach consumers two decades ago, that's no longer the case.
Now, programmatic advertising has taken over, and The Trade Desk (TTD 1.67%) has emerged as one of the top ways to invest in this space. So why is this advertising form better than previous iterations? Read on to find out.
The Trade Desk's new product is a game changer
Advertisers want as much information as possible on the viewer when they purchase ad space. So rather than broadcasting an ad to a large audience, The Trade Desk's platform helps advertisers instantly analyze the viewer visiting the site, podcast, or connected TV ad and bid for the ad space accordingly.
In the past, tracking cookies used to provide this information to advertisers, but those have some problems. First, there are privacy concerns with tracking cookies, as some of the information they harvest can be quite personal. Second, tracking cookies don't follow users around from device to device, making it difficult to establish an advertising profile on a TV since few people browse the internet there.
The Trade Desk's solution to this problem is its open-source Unified ID 2.0 (UID2) product. UID2 creates an anonymous ID associated with an email address, addressing security concerns while solving the connected TV problem.
The software also has an impressive amount of data, with over 200 performance measures and 300 variables it collects to understand what audience the ads attract and whether the visit was successful.
With The Trade Desk, ad campaigns are more efficient and effective. Plus, it provides unmatched insight. These factors show the usefulness of The Trade Desk's platform, but do the financials back up the offering?
2023 will be a slower year for The Trade Desk
In Q4, The Trade Desk grew its revenue by 24% to $491 million, slightly slower than 2022's 32% full-year pace. Revenue growth for a company associated with advertising was impressive in Q4, especially considering how weak the advertising landscape was.
It's not expected to be much easier in 2023, with Wall Street analysts expecting 19.4% revenue growth. However, a new wave of growth (likely due to a projected rising economy) is expected to increase The Trade Desk's revenue by 24.3% in 2024. So, investors must consider its larger future when analyzing how the company performs in 2023.
Unlike many young tech companies, The Trade Desk is profitable and posted earnings per share (EPS) of $0.14 in Q4, with a net income margin of 14.5%. Throughout most of 2022, The Trade Desk gave one-time stock grants to its CEO for long-term performance goals, which hurt its full-year margin. Should The Trade Desk maintain that profit margin throughout 2023, it will likely produce at least $272 million in earnings, valuing the stock at 108 times next year's earnings.
That's not a cheap valuation, and looking at its price-to-sales multiple doesn't offer any solace either.
TTD PS Ratio data by YCharts
So what should investors do? The Trade Desk is a great company that is executing well, but the stock is extremely expensive. Because of this, I'd caution investors not to take a position in the stock right now, especially since it's at the higher end of its valuation history but the lower end of revenue growth.
The stock is quite extended right now, but investors shouldn't lose sight of this stock. If it falls to a more reasonable valuation range, it's a screaming buy. But at today's prices, I'll pass.
