The Trade Desk (TTD 2.99%) put any doubts about the company's ability to continue growing rapidly during this challenging macroeconomic environment to rest on Wednesday. The ad tech company, which provides a platform to help marketers and advertising agencies get the most out of every dollar of ad spend by buying digital ads programmatically, reported 21% year-over-year revenue growth in Q1. This was, once again, far greater than the growth rates seen by many of The Trade Desk's digital advertising peers, including Alphabet and Meta Platforms.
While the company's strong growth rate was impressive, there was arguably a more important yet easily overlooked takeaway from the quarterly update: The Trade Desk used its recently announced share repurchase authorization to aggressively buy back its stock. Indeed, at the rate the company is buying back its stock, the program could be fully exhausted by the end of Q2.
Here's what investors should know about the purchases and the buyback program overall.
A testament to management's bullish outlook
The Trade Desk first announced its share buyback program alongside its fourth-quarter results in February. Its board of directors authorized $700 million of The Trade Desk's cash hoard to be used to buy back its stock.
While part of the repurchase program is "designed to help offset the impact of future share dilution from employee stock issuances," according to the company's fourth-quarter earnings release, management also said in its fourth-quarter earnings call that it also planned to repurchase shares opportunistically. Based on how aggressively The Trade Desk has been spending the money it set aside for repurchases, it has followed through on this plan. By the end of Q1, the tech company had already spent $293 million repurchasing its shares. This means it exhausted 42% of its authorization in just a month and a half, as the repurchase program was announced on Feb. 15. If The Trade Desk were to continue buying back its stock at this pace, it would easily exhaust the entire program by the end of Q2.
Considering that the $700 million authorization at the time represented nearly half of the company's total cash, cash equivalents, and short-term investments, it's pretty impressive how quickly The Trade Desk is executing this program. Going further, it's fair to say that such an aggressive move is a testament to management's bullish outlook for the stock over the long haul.
A high valuation limits the impact
While it's a good sign to see management so bullish on its own stock, investors should keep in mind that the buyback's impact on reducing share count is significantly limited by the stock's valuation.
Given the stock's current market capitalization of about $31 billion, the remaining $407 million left in the company's program would only reduce The Trade Desk's total share count by 1.3% (assuming the average price paid is around the stock's price today). So even though $407 represents 30% of the cash position The Trade Desk ended Q1 with, it only equates to a sliver of the pricey stock's current market cap.
So should investors follow The Trade Desk management's lead and buy shares, too? Given the stock's high market cap relative to The Trade Desk's trailing-12-month free cash flow of $505 million, it might be wise to wait to see if the market provides investors with a more attractive entry point into the stock. Still, investors shouldn't discount management's aggressive move; they certainly have an inside view of The Trade Desk's operations. If management believes in the stock enough to spend such a large chunk of their cash so quickly, investors may want to keep a close eye on The Trade Desk, or possibly do a deeper analysis of the stock.
