Earnings season can be a great time to scoop up shares of great stocks for the long term, especially when short-term traders sell off a stock based on a slight disappointment, either real or perceived.
Such post-earnings declines happened to two of the best digital advertising stocks in the world this earnings season: Alphabet (GOOG 9.96%) (GOOGL 10.22%) and The Trade Desk (TTD 1.67%). But which is the better stock to scoop up right now on the dip?
Reasons for their sell-offs
Alphabet is the parent company to Google, the world's dominant search engine, as well as an extensive third-party ad network, and YouTube, the largest internet streaming video platform. And of course, Alphabet also has an up-and-coming cloud computing platform, along with a number of unprofitable futuristic technology bets.
Meanwhile, the Trade Desk is the leading buy-side programmatic digital advertising platform. The Trade Desk's platform allows businesses to buy ads across a number of different formats in an automated, data-driven way across streaming TV, mobile, traditional banner ads, and audio formats, driving up advertisers' targeting ability and therefore their return on investment.
Both companies actually beat revenue and profits on their third-quarter earnings, but fell nonetheless. For Alphabet, while its digital ads business did well, the company's cloud platform decelerated to just 22% growth from 28% in the prior quarter. That stirred fear that Google is falling behind its large rivals in the cloud business, which posted either consistent or accelerating growth after an 18-month soft patch.
Meanwhile, The Trade Desk sold off too, as it projected "only" 18% growth for its current fourth quarter over the prior year. That would be a marked deceleration from its prior quarter's 25% growth.
Google investors should take a breath
Neither of the two sell-offs seem to be reasons to panic about each company's competitive advantage or long-term outlook.
In particular, while Google's cloud unit is now profitable, investors should remember that Alphabet still gets basically all of its profits from its digital ad empire -- and that empire seems to be doing very well indeed, leading to the third-quarter beat.
While many had feared Microsoft's Bing would take market share from Google Search thanks to Microsoft's ownership of OpenAI, the company behind ChatGPT, that clearly hasn't happened yet. Google search advertising grew 11.3% last quarter, despite high economic uncertainty and the Google Search's already-massive size.
Speaking of OpenAI, the current turmoil at the Microsoft-owned start-up may allow for a competitive opening for Google's cloud business. It's also never a great idea to extrapolate results from a single quarter out into the future, as Google has a number of moving pieces going on under the hood of its cloud division, including the timing of discounts and customer mix.
But CEO Sundar Pichai was quick to remind investors that over half of all generative artificial intelligence (AI) start-ups still use Google Cloud. So it may be a little too early to declare that Google has lost or fallen behind in the AI cloud race.
Meanwhile, Google investors should look forward to the release of Gemini, Google's upcoming large language model that will be a ChatGPT competitor, which should be released either late this year or early in 2024. If Gemini, the multi-modal collaboration between Google Brain and DeepMind, can seriously challenge or surpass ChatGPT-4's capabilities, Google Cloud's fortunes could very well turn around.
Remember, it's early days in the AI revolution, and the race will be a marathon, not a sprint. Alphabet also invented many of the foundational features used by OpenAI and others, so it should be able to hold its own in the AI industry.
Image source: Getty Images.
The Trade Desk investors should take a breath, too
Meanwhile, the Trade Desk's sell-off also looks a bit overdone. That's because this quarter's slowdown can be attributed to a handful of specific advertising categories, especially automotive customers, as well as media and entertainment.
But there was a very good reason for that slowdown: Those two industries' workers were on strike to start the quarter. However, both strikes have since been resolved. The United Auto Workers strike concluded at the end of October. Meanwhile, the Hollywood studios reached a deal with the Screen Actors Guild two weeks later. Given that uncertainty is now behind both industries, each will likely start advertising again.
The Trade Desk's management also noted that ad spending had "stabilized" in November, so perhaps the company's guidance was a bit cautious, given that the company reported earnings on Nov. 10.
But that short-term hiccup driven by external factors doesn't seem to be damaging The Trade Desk's formidable product offering or competitive advantage. The company has been outgrowing advertising partners for years, and that outperformance continues.
Meanwhile, management noted more customers are adopting a new kind of identifier platform called Universal ID 2, or UID2. UID2 is a data-sharing cooperation between different large publishers and retailers organized by The Trade Desk, which allows advertisers to use shared data to better promote their campaigns, and in a way that also provides more privacy than cookies. Of note, cookies, the current way in which a browser tracks your online activity, are being phased out in 2024 over privacy concerns.
As ads served by the Trade Desk get more accurate, advertisers should get a higher return, and The Trade Desk should earn more of the advertising industry pie.
Which is the better buy?
So, both companies seem like opportunities, but which is the better buy?
For conservative investors, Alphabet seems like the choice here. The stock trades around 22.5 times next year's earnings estimates, despite its ad business still growing double digits, its cloud business growing above 20%, and a substantial amount of excess cash on its balance sheet. With a more diversified business and many ways to win, Alphabet offers investors better downside protection than The Trade Desk. That's especially true if Gemini turns out to be as good as some expect.
That being said, while the Trade Desk is expensive, aggressive investors may not want to overlook the stock. The Trade Desk now trades around 50 times 2024 adjusted non-GAAP (generally accepted accounting principles) earnings, but the platform is still in heavy investment mode, incorporating more and more AI into its algorithms and product offerings, while also expanding geographically.
Meanwhile, the digital advertising business is set to grow from about $550 billion last year to $870 billion by 2027, according to eMarketer. Considering the Trade Desk has made just $1.83 billion in revenue over the last 12 months, or 0.3% of 2022 digital ad spend, and that it's continuing to take market share, younger and more aggressive growth investors may wish to pick up Trade Desk shares as well.
