Is The Trade Desk’s Plunge a Hidden Opportunity?

It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here.

Global advertising racks up $830 billion annually.

But it’s not the world of Mad Men anymore.

Increasingly, advertisers use digital media to reach their target audiences.

Platforms like The Trade Desk (TTD) enable advertisers to organize and efficiently spend their money to yield the best results.

Despite receiving regular name recognition from investors in the last few years, TTD has been around since 2009 and has been profitable since 2013.

Yet, the company’s breakneck growth was questioned during its latest earnings release, sending shared plummeting.

Financial pros read through the earnings release. But from what our Trackstar data shows, they were somewhat cautious.

With a P/E ratio and price-to-cash ratio near 60x, investors aren’t sure whether TTD is seeing a permanent shift in its growth trajectory or just a one-off.

Here’s what we know.

The Trade Desk’s Business

TTD provides excellent visuals to describe what they do in the advertising space.

Source: The Trade Desk Q3 2023 Earnings

Their platform enables advertisers to advertising aggregators to manage their digital campaigns from start to finish in one platform.

This makes it easy to make the most out of each advertising dollar they spend.

They offer everything from programmatic advertising to audience targeting.

Source: The Trade Desk Q3 2023 Earnings

The nearly 30% hit to the company’s stock came after they issued light Q4 guidance for revenues of at least $580 million vs expectations of $611 million (~25% growth).

Source: The Trade Desk Q3 2023 Earnings

Growth deceleration has been a concern as revenues expanded during the pandemic but lost momentum.

Some analysts worry the company is heading for sub-20% revenue growth, which would decimate the current stock price based on assumptions currently priced in.

Financials

Source: Stock Analysis

TTD isn’t that large of a company, only generating $1.8 billion annual revenues.

While they run a fabulous gross margin, operating costs have skyrocketed, cruising operating marges by more than half over the last decade.

However, free cash flow margin continued to rise, implying most of the costs are non-cash items. We can see above how the depreciation and amortization expenses exploded in the last few years.

Valuation

Source: Seeking Alpha

While no company has the singular focus of TTD, we compared them to other SaaS companies.

All the ones listed here trade at ridiculous margins. So, TTD is safely the cheapest on nearly every measure except price and enterprise value to sales. In those two instances, Shopify (SHOP) is cheaper.

Growth

Source: Seeking Alpha

It’s tough to compare the growth of these companies since each has ridiculous numbers save for Microstrategy (MSTR).

DataDog’s (DDOG) 5-year average revenue growth of 75.5% is particularly notable as it means they effectively doubled in size every 1.5 years.

However, TTD delivered the best average free-cash-flow growth over the last three years, a significant point in its favor.

Profitability

Source: Seeking Alpha

What’s interesting is that besides TTD, none of its peers are profitable except for MSTR.

And only TTD, DDOG, and Cloudflare (NET) put up decent free-cash-flow margins.

Our Opinion 6/10

We don’t believe the timing is right for this stock.

While The Trade Desk has an incredible product, it operates in a narrow space.

Plus, advertising spending has been soft lately.

We’d prefer the company at much cheaper prices or a more expansive SaaS company like Salesforce (CRM).

• Don’t Get Burned By This Hot Investing Trend
• Are Alternative Investments a gray area? The Alt can add some color
• 12 Most Promising Stocks to Buy According to Hedge Funds
• Up 87% YTD, Is It Too Late to Buy MercadoLibre Stock?