It would be difficult to criticize The Trade Desk's (TTD 1.67%) recent business performance. Everything seems to be going right for the company. Revenue is growing at robust double-digit rates, customer retention remains extremely high, and the company has a debt-free balance sheet and plenty of excess cash flow.
This financial success, of course, isn't too surprising for those following the company closely. The programmatic advertising specialist's product execution has been astounding in recent years. The Trade Desk's fourth-quarter results were just more of the same. But there's a looming question: Is the company living up to its current valuation?
Here's a close look at some of the ways this tech company continues to impress investors.
Market share gains
One of the biggest things that stands out about The Trade Desk's recent business performance is its market share gains. As The Trade Desk CEO Jeff Green pointed out in the company's most recent earnings call, the ad tech specialist has grown its revenue faster than the rest of the digital advertising space in each of the last eight consecutive quarters.
In one specific example of its momentum relative to major peers in the space, The Trade Desk's full-year 2023 revenue increased 23% year over year -- and that's on top of 32% growth in 2022. Compare that to Meta Platforms' and Alphabet's 16% and 9% year-over-year revenue growth rates in 2023, respectively.
Looking ahead, Green said in the company's fourth-quarter earnings call that he expects top-line momentum to persist.
While there is much to celebrate about 2023, I'm even more excited about 2024 and beyond, I've never felt more confident heading into a new year. I believe we are uniquely positioned to grow and gain market share not only in 2024 but well into the future.
Product execution
Another aspect of The Trade Desk's business worth applauding is its rapid pace of innovation.
The company's biggest innovation in 2023 was its overhauled buy-side platform, Kokai. Green said that his product team recently visited nearly 1,000 clients and almost all of them said Kokai was a significant platform upgrade for them.
The Trade Desk also made notable progress in retail media (partnerships with retailers in which they bring data to its platform to share with advertisers). This is "one of the fastest-growing areas" of The Trade Desk's business, Green said during the fourth-quarter earnings call.
But many other innovations are playing a key role in The Trade Desk's customer approval. Some key innovations gaining steam with customers include The Trade Desk's identity solutions UID2 and EUID, its direct pipeline to advertising inventory called OpenPath, and its connected television (CTV) integrations.
All of these factors help contribute to The Trade Desk's high customer retention rate, which has remained above 95% for 10 years straight.
Robust financials
Lastly, The Trade Desk is a cash flow machine. Free cash flow, or the cash flow left after capital expenditures are accounted for, totaled $543 million in 2023. Such strong cash flow, combined with a debt-free balance sheet, means the company can fund its business growth while also returning cash to shareholders. The Trade Desk repurchased $220 million worth of its stock during Q4 alone and said in its earnings release last week that it has authorized $700 million for repurchases going forward.
All of these factors combine to help justify the stock's current valuation of approximately 73 times free cash flow. With this said, shares certainly aren't cheap. It might be wise for investors interested in buying the stock to wait and see if shares pull back to a valuation that leaves more room for error. But given the company's strong execution, it would also be tough to call the stock overvalued at this point.
