For the last several months, big tech companies like Alphabet have been pounding the alarm on tighter corporate budgets and the subsequent effects this is having on marketing spending in particular. Given the rising concerns of a recession, decision-makers at corporations are becoming increasingly selective on operating expenses. Therefore, discretionary items such as marketing campaigns are seeing a dramatic pullback.
Yet, despite these macro trends, adtech firm The Trade Desk (TTD 1.84%) recently showed investors just how resilient its business is. Let's dig into the company's 2022 earnings and determine if the stock deserves a spot in investors' portfolios.
Impressive financial results across the board
For the year ended Dec. 31, The Trade Desk reported revenue of $1.6 billion, an increase of 32% year over year. Although the company's revenue growth is shrinking, compared to 43% top-line growth in 2021, it's hard to discount these results in such a tough economic climate.
The company's CEO, Jeff Green, went into detail about how and why The Trade Desk is seeing such positive results compared to its peers. During the earnings call, Green referenced a report by Insider Intelligence. According to the research report, 2022 was the first time in a decade that Meta and Google did not account for over half of the digital advertising market.
Green went into a fair amount of detail on the call as to why he believes The Trade Desk, among other smaller advertisers, are catching up to Big Tech. Competitors like Google and Meta effectively leverage the data it gathers through search to push ads the algorithm thinks users want to see. By comparison, The Trade Desk has been investing relentlessly in its own tools such as its Galileo platform. These investments are helping The Trade Desk catch up to Big Tech, and proving that its infrastructure is able to help marketers hone their strategies and generate the best possible return on investment for those ad budgets.
Furthermore, despite the slowing revenue growth and heavy internal investing, The Trade Desk still managed to turn a profit. The Trade Desk reported $0.11 earnings per share on a generally accepted accounting principles (GAAP) basis, and generated $549 million in operating cash flow, compared to $379 million in 2021.
The cash flow increase directly impacted the balance sheet, which boasted cash equivalents of $1.0 billion as of Dec. 31 2022. For reference, the company finished 2021 with $754 million of cash and equivalents. These bottom-line increases resulted in a nice reward for shareholders.
Image source: Getty Images.
Rewarding shareholders
During the earnings call, CFO Blake Grayson stated:
We have no debt on the balance sheet. And finally, as you've seen in our press release, we announced a $700 million share repurchase program this morning. Our strong balance sheet, coupled with the strength of our business model that produces significant cash flow, led to a review of our capital allocation strategy. Our review addressed investments in our business, including managing our working capital, the potential for acquisitions, and options for returning excess capital to our shareholders.
Honestly, it seems to just get better and better. The Trade Desk is growing revenue by over 30% annually, the company is consistently profitable, it has a robust balance sheet, and it's buying back shares. It should be pretty obvious that The Trade Desk is committed to creating shareholder value.
However, let's not get too excited just yet. It is important to understand valuation here.
What does valuation imply?
The Trade Desk stock is up over 40% year to date on the evening of Monday, April 24. The majority of that upswing coincided with fourth-quarter earnings in mid-February when the stock shot up from $50 per share to $66 dollars per share.
It can be tempting to follow momentum, especially when it follows a lot of good news. But as investors, it's paramount to act on logic over emotion. Despite its robust growth, the fundamentals imply that The Trade Desk is overvalued. Let's focus on the price-to-earnings (P/E) ratio in particular.
The Trade Desk has not reached long-term profitability. Stated another way, even though the company is net-income-positive, its earnings per share (EPS) are pretty low. Alphabet's EPS is almost $5. By comparison, The Trade Desk's is $0.11.
While The Trade Desk very much should be categorized as a growth stock, it's P/E multiple should raise some eyebrows. The company trades at over 500 times earnings. To put this into perspective, the long-run average of the S&P 500 is between 15 and 16 times P/E.
It's difficult to justify this premium when top-line growth is shrinking, and profits are relatively low; granted, this is due to macro factors and not specifically poor performance in the underlying business. Although The Trade Desk has an impressive operation, the fundamentals tell us that stock is pretty expensive.
Investors are better off listening to future earnings calls and seeing if management is meeting or beating its guidance. It will be important to hear how management plans to navigate the cloudy macroeconomic environment. While the stock may not be a sound buy today, the company is illustrating that it has the ability to generate growth in tough conditions and is not afraid to reward shareholders. Patience will be rewarded here, and The Trade Desk is absolutely worth monitoring on your long-term radar.
