The stock of programmatic marketing automation company The Trade Desk (TTD 1.67%) has had a strong start in 2023, skyrocketing by 52% year to date, as opposed to the S&P 500's modest gain of 10%.
The Trade Desk's first-quarter 2023 earnings report, released after the market close on May 10, revealed that the company's revenue and earnings surpassed what many analysts had predicted. Moreover, the company's projections for the second quarter also exceeded analysts' expectations. This quarterly report also displayed The Trade Desk's continued outperformance over the rest of the adtech industry, enabled by industry dynamics that management is confident will continue well into the future.
Read on to learn why this is one of the best growth stocks in this bear market.
The Trade Desk is crushing it
The Trade Desk grew its first-quarter revenue by 21% over the previous year's comparable quarter to $383 million -- outstanding considering many of its adtech peers have struggled to achieve double-digit revenue growth in this current environment.
TTD Revenue (Quarterly YoY Growth) data by YCharts
In a challenging macroeconomic environment where companies are penny-pinching, marketers have gravitated toward The Trade Desk's programmatic ad market as it is transparent and has more clarity about whether an advertiser is getting the most bang for their buck on their ad investments. In contrast, programmatic ad markets from Alphabet's Google and Meta Platforms have a reputation for being murky to the point where marketers are unsure about their ad's effectiveness and whether they are getting the best value for their advertising dollar. Consequently, The Trade Desk has much more revenue growth during this advertising downturn and it is snatching away market share. And once it takes away market share, it doesn't relinquish it. The company has maintained an outstanding customer retention ratio of 95% for nine years. Most cloud industry investors consider a customer retention ratio above 90% excellent.
Another thing separating this company from many peers is that it prudently managed its hiring plans and operating expenses during a healthy ad market. Consequently, when the ad industry's growth declined, its workforce and spending remained appropriately sized for the business it was bringing in, positioning it to continue investing in the best growth opportunities and hiring the best talent. In contrast, most of its peers implemented a "growth at all costs" strategy during good times, resulting in mass layoffs and extreme belt-tightening once the ad market turned sour. And as its competitors retrench and scale back their aggressive growth plans to save money, The Trade Desk continues to invest in expansion and take market share that its competitors are ceding.
Some believe the market overvalues the stock
Despite its superior prospects, investors had a muted reaction to its excellent first-quarter earnings report, and the stock's market value remained virtually unchanged six days after the report's release. The reason? The Trade Desk sells at a price-to-sales (P/S) ratio of 20, much higher than its online advertising peers and higher than the overall tech sector average P/S ratio of 6.
TTD PS Ratio data by YCharts
Suppose you decide to become a shareholder of The Trade Desk; you must be comfortable with people bearish on the stock arguing that it is selling at a very high valuation in a poor economic environment. The bears will point out that you risk a rapid loss in the short term should the economy worsen and the company's fundamentals deteriorate.
However, bullish investors argue that the company's outperformance versus other adtech companies and the tech industry, generally, has earned it its current valuation. Moreover, bullish investors often focus on the long term rather than short-term losses on paper, and this company has excellent long-term prospects.
A leader in retail media networks
Management believes connected TV is the most significant factor in marketers redirecting their spending from Google and Facebook to The Trade Desk. Still, retail media networks are a very close runner-up. Therefore, you should learn what retail media networks are and why they are essential to The Trade Desk's future revenue growth.
Retail media networks are advertising platforms run by retailers that place ads on their own websites or apps. The advantage these networks have is they use the first-party data that the retailers collect from their customers to target ads for advertisers.
In an era where government privacy regulations and Apple's privacy initiatives have choked off the value of third-party data, this first-party data collected by retailers has become crucial to advertisers for ad targeting and measurement of advertising effectiveness.
The company announced at its Investor Day in October 2022 that it had already partnered with over 80% of the largest retailers in the U.S. in retail media network initiatives. Although this opportunity is new and the company rarely gives exact numbers, the CEO highlighted in The Trade Desk's third-quarter 2022 earnings call that its partnership with various retailers increased total shopper marketing spending by approximately 3 times in just one quarter.
Should you buy the stock?
The Trade Desk's market share is under 1% of today's total addressable market of $830 billion. So although it's growing faster than the rest of the adtech industry, it's still tiny compared to the overall opportunity.
Image source: The Trade Desk.
Some experts estimate this market could grow to $3 trillion within a decade as marketers shift from traditional to programmatic digital advertising.
The best part is that The Trade Desk's management has positioned the company for significant growth in this enormous market.
If you can weather potential temporary declines in the stock price, this company remains one of the best-performing businesses you can invest in during this uncertain economy.
