How Much Is Too Much To Pay For Disruptive Tech

The global programmatic advertising market is expected to hit $150 billion by 2023. That’s an annual growth rate of 22%, according to sources at Market Research Future.

While we all know Google (GOOGL) is one of the top dogs in the space. However, it now faces greater competition. One of those companies going after Google is The Trade Desk (TTD). 

Like most tech names, shares have taken a significant dive in 2022. 

When we looked at what we like to refer to as the ‘2nd Tier’ digital advertising companies, The Trade Desk used to see hundreds of searches each week, whether we looked at retail or financial pros.

Yet, as many of the momentum technology names like TTD, such as Zoom (ZM), Fastly (FSLY), and the like sold off, interest began to wane.

That’s actually a good sign as it lends names to overshoot to the downside.

The Economist, Morning Brew, FT, WSJ, Bloomberg and now…(Sponsored)

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The Trade Desk (TTD) Business 

TTD operates a self-service cloud-based media-buying platform. It allows buyers to create, manage, and optimize data-driven digital advertising campaigns in various ad formats and channels, including display, video, audio, in-app, native, and social, and on various devices, such as computers, mobile devices, and connected TV. 

TTD serves advertising agencies and other service providers for advertisers. 

The company has over 225 partners, they include media heavy hitters like Disney, Tik Tok, Fox, ESPN, Hulu, WSJ, and Spotify 

In 2021 the gross spend on its platform was approximately $6.2 billion, a 47% increase YoY. 

What’s really impressive about TTD is its product stickiness. Customer retention is over 95%, which has been consistent for the last 8 years.

It should come as no surprise that the company has accumulated several accolades, including Fortune’s 100 Fast Growing Companies for 2021 and Forbes Global 2000 List. 

Financials

TTD has grown its revenues for 8 consecutive years. And substantially, at that. The firm generated $203 million in revenue in 2016, and in 2021 it did over $1.19 billion in revenue. 

But that’s not all. 

The firm has managed to improve its gross margin to levels never seen before. In 2021 the company reported a gross margin of 81.5%

In 2021 the firm had a positive free cash flow of $314 million. 

TTD has a current ratio of 1.71x. Its highly liquid assets are 1.71x greater than its short-term liabilities. 

It has a quick ratio of 1.65x, which means its highly liquid assets are 1.65X greater than its short-term liabilities. 

The capital structure for TTD is as follows: total debt of $284 million and cash upwards of $958.78  and a market cap of approximately $23.7B

Valuation

TTD has a price-to-sales ratio of 13.82x, which is significantly higher than the sector median. 

The firm has a P/E Non-GAAP of 48.85x, which is well above the sector median of 18.21x. 

While valuations may read high for TTD, it really shines in the growth department. 

The company has seen its revenues grow 43.11%, much better than the sector median of 19.67%.

And it does generate positive cash flow.

Our Opinion – 5/10

Despite its rapid growth over the years and its excellent profit margin, TTD is still considered an expensive stock. Stocks with P/E above 50 are just not going to do well in this current environment. 

Even though shares are down 50% YTD, it doesn’t mean they can’t go lower. 

And unless sentiment changes, we believe your money can be spent in better places. 

That said, if shares get cut in half from here, then we have something worthwhile.