Few industries are as old and consistent as advertising. While advertising has changed its form many times, it's a part of human culture. Leading the way into the next phase of advertising is The Trade Desk (TTD 1.67%), which specializes in digital advertising.
While companies that focus on selling advertising space are subject to the roller coaster of ad demand, The Trade Desk is classified as ad tech company and it doesn't experience the same boom-and-bust cycle. It has also produced solid growth and has a massive market in front of it. So is The Trade Desk a good stock to buy now? Let's find out.
The Trade Desk has an essential product
In a typical ad transaction, there's a buyer and a seller. A seller is an entity with ad space, like a website or podcast. The buyers are companies with a product or service they want to publicize. In previous ad delivery applications, a buyer might go straight to the seller and advertise to the masses without knowing which customers it might attract. This created a lot of waste, as a sports warehouse business may not be targeting everyone who reads a newspaper.
Now that more advertising has shifted to a digital front, gathering information on who is viewing an ad is easier. This makes it easier to target a specific demographic and have a more effective advertising campaign. This is where The Trade Desk enters the picture, as its buy-side platform gives advertisers the tools to ensure their ad reaches the intended audience. Through its automated ad bidding system, The Trade Desk can factor in multiple data points and increase the bid of an ad if it detects a strong chance of a conversion.
With the ability to place ads on connected TV, online video, podcasts, and other displays, The Trade Desk's platform gives advertisers the reach they need to target consumers all over the digital landscape.
This broad reach has worked well for The Trade Desk, as it has performed exceptionally well over the past few years.
The stock is expensively valued
In the first quarter of 2023, The Trade Desk's revenue rose 21% year over year to $383 million. Additionally, it also squeaked out a $9 million profit, although this was adversely affected by a $60 million CEO performance grant. If you strip that cost out, The Trade Desk actually made a $69 million profit, good enough for an 18% profit margin.
Furthermore, it gave strong second-quarter guidance of 20% growth, indicating demand for its products remains at about the same level as in the previous quarter. This is key, because the ad market isn't in good shape thanks to economic uncertainty. Companies tend to pull back on advertising budgets during tough times, as it's an easy expense to control compared to laying off workers or cutting projects. With The Trade Desk still expanding during these times, it shows clients are certain that The Trade Desk's products can deliver outsized results compared to blind advertising.
Because The Trade Desk has proven it can still grow during good times and bad, it has shown its resilience. This is a great trait to look for when investing, as it makes the stock less volatile.
But this performance also comes with a hefty price tag.
TTD PS Ratio data by YCharts
At 23 times sales, the stock is richly valued. Even though The Trade Desk is growing at a decent 20% pace, that's not nearly enough to justify the price tag, in my opinion.
Say it continues its 20% annual growth rate for the next five years and returns to the 29% profit margins the company delivered during 2021. That would give The Trade Desk $4.11 billion in annual revenue and $1.19 per share in profits.
That would value The Trade Desk at 9 times sales and 31 times earnings, but at today's stock price, and revenue and earnings based on projections five years from now.
While The Trade Desk has the potential to grow at those sustained levels, it won't be easy. Plus, with investors giving up five years of growth to reach a sane valuation, the stock doesn't look attractive here. However, I'd be a buyer if the valuation falls to more reasonable levels.
