Cathie Wood has developed a reputation for catching tech trends early. She's a big believer in the power of disruptive technology, and she invests in innovative, and sometimes risky, stocks.
Her company, Ark Invest, markets exchange-traded Funds (ETF) to investors. These ETFs are fairly small and highly curated, and each one has a different focus.
Since they all invest in disruptive technology, though, there are many stocks that show up in more than one ETF.
Recently, Wood picked up shares of The Trade Desk (TTD 4.05%) for the flagship Ark Innovation ETF (ARKK 1.86%), as well as the Ark Next Generation Internet ETF (ARKW 2.73%). The Trade Desk stock is down 63% this year, in sharp contrast with an 18% gain for the S&P 500. What does she see that the market doesn't?
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The premier ad tech company
The Trade Desk is a digital advertising platform that connects ad buyers and ad opportunities. It sounds simple, and it mostly is, but it's also full of robust technology that helps clients make the best use of their money. The data-rich platform, powered by artificial intelligence (AI), gets ads placed in mediums where they can convert customers, making each dollar count to the maximum.
The Trade Desk has been around for a while now, and it works with the biggest agencies and brands. It launched a huge upgrade to its platform in 2023 called Kokai, with a new, easier-to-use interface and powerful AI models and algorithms. The company says that the platform has access to 13 million advertising impressions per second, and it can help advertisers optimize spending and manage their campaigns in the most effective and cost-efficient way.
It's become a $2.5 billion company, double the revenue it had in 2021, and it's still growing at a healthy rate. Revenue increased 18% year over year in the third quarter. Earnings per share (EPS) increased from $0.19 last year to $0.23 this year, and profit margin expanded from 15% to 16%.
NASDAQ: TTD
Key Data Points
Risks and competition
The Trade Desk has been dealing with several problems over the past few years, starting with clients cutting their budgets because of inflation. Although it's growing by double digits, the growth rate has been declining, and profitability has been inconsistent over the past few years.
More recently, the market didn't love its third-quarter report. That was in part due to its outlook, which is guiding for revenue to increased 13% year over year. But in general, highly valued stocks have been falling despite top performance.
It's also been impacted by competition from some formidable giants like Amazon and Meta Platforms, both of which offer advertising platforms beyond their own websites and streaming services, plus they offer complete advertising management services.
Many opportunities
The Trade Desk has built a large and powerful platform servicing high-profile clients, and it's holding its own against the mega-companies. It has a client retention rate higher than 95%, which it's had for the past 11 years, indicating customer satisfaction.
It has continuing opportunities as ad-supported streaming continues to grow and all of the premium streaming companies launch their versions. That's in addition to the regular ad-supported streaming channels. Digital media continues to grow in every way, and more transactions are happening online even for print media.
It also has strong expansion opportunities internationally. Right now, 88% of client ad spend is in the U.S., with only 12% internationally, while 60% of all ad spend is outside of the U.S.
Is it cheap enough to buy?
Even at the current price, I wouldn't call The Trade Desk stock cheap. It trades at a P/E ratio of 49 and a price-to-sales ratio of almost 8. That's a premium valuation.
The Trade Desk may deserve some kind of premium for strong growth and high profits, but it's unsurprising that the stock has dropped to these levels considering the company's recent results. The Trade Desk is a great company with many opportunities, but it still looks a bit expensive right now, and investors might want to buy it using a dollar-cost averaging strategy.
