Advertising technology company The Trade Desk (TTD 3.10%) reported some terrific first-quarter results on Wednesday afternoon. Even more, the company provided guidance for more strong double-digit growth in Q2. Yet shares of the growth stock fell on Thursday, even as the tech-heavy Nasdaq ticked higher. This begs the question: Is the stock simply overvalued? Perhaps the stock's 43% year-to-date gain has simply already priced in strong underlying business growth in the years to come and the ad tech specialist will need to deliver near-flawless execution to live up to its valuation.
A close look at The Trade Desk's business and its stock's valuation, however, reveals that shares probably deserve the premium valuation they are trading at. Not only is the company's programmatic digital ad-buying platform gaining market share today but there's good reason to believe that The Trade Desk has a long runway for further market share gains in the year to come.
Huge market share gains
The uncertain macroeconomic environment that is limiting many marketers' budgets doesn't seem to be weighing heavily on The Trade Desk. The company's first-quarter revenue increased 21% year over year to $383 million. This blew past analysts' consensus forecast for first-quarter revenue of about $365 million. Even more, the ad tech company guided for second-quarter revenue of "at least" $452 million, implying 20% year-over-year growth or greater.
These results were in contrast to poor trends in Alphabet (GOOG 1.63%) (GOGL 4.14%) and Meta Platforms' (META 0.40%) digital advertising businesses, where the challenging macroeconomic is suppressing growth. Alphabet's first-quarter advertising revenue fell 0.2% year over year. Meta's increased just 4% over this same period.
In the company's first-quarter earnings call, The Trade Desk founder and CEO Jeff Green credited its platform's strong market share gains to advertisers' decisions to shift more of their campaign dollars to an agile, data-driven platform "where they can have more confidence that those dollars are working as hard as possible."
A massive addressable market
There's good reason to think The Trade Desk's strong growth can persist for years. The best argument for this optimism is the company's massive addressable market.
In its earnings calls, The Trade Desk management often says that the company's total addressable market is marching toward $1 trillion. Management arrives at this view by extrapolating out a few years from where the global advertising market is today. The Trade Desk estimates that the current addressable market in advertising is $750 billion (and growing), but figures vary slightly from one research firm's estimate to another's, based on the methodology used. Advertising agency GroupM forecasts the global advertising market to surpass $1 trillion for the first time in 2026. Green thinks of most of the advertising market as The Trade Desk's opportunity, as he believes virtually all advertising will eventually be bought programmatically -- The Trade Desk's bread and butter.
One subset of the advertising market is particularly exciting to management: TV. The total global spend on TV advertising, by itself, is likely around $250 billion annually. Connected TV (CTV) advertising, however, still only accounts for a small fraction of this spend. This is despite the fact that consumer viewing is rapidly shifting to CTV -- a trend that will inevitably pull more market dollars into the space. The Trade Desk has invested aggressively in building products to help advertisers buy connected TV ads programmatically, so it's prepared for a wave of shifting marketer budgets.
Valuation
All of this to say, The Trade Desk stock deserves a pricey valuation. Though its $31 billion market capitalization may have already priced in strong execution for years to come. After all, The Trade Desk's trailing-12-month free cash flow is just $505 million -- impressive in its own right but fairly low relative to the company's market cap. So while the stock may not be overvalued, it's probably not undervalued either.
Sure, The Trade Desk's underlying business could surprise to the upside over the next 10 years and make the stock look cheap today in retrospect. But investors should price in a margin of safety in case things go awry. A profitable technology platform like The Trade Desk's could attract intense competition. Even more, tech platforms are susceptible to disruption; investors should carefully consider just how sure they are that The Trade Desk can maintain its competitive advantage for the next 10 years.
If I had to peg a rating to The Trade Desk stock, I'd refrain from calling it a sell or a buy. Instead, shares seem to be trading in the ballpark of fair value, making the stock look like a hold. Though investors should keep in mind that there are significant risks to owning the stock. In addition, shares will likely trade with lots of volatility. So brace yourself.
