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Motley Fool Issues Rare “All In” Buy Alert
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Although the stock of The Trade Desk (TTD -0.58%) has lost 48% so far this year due to a terrible macroeconomy slowing its advertising technology (adtech) business, its latest earnings report revealed reasons why many consider it one of the best growth companies.
Here are three reasons why The Trade Desk is the best growth investment today.
Before The Trade Desk released its latest earnings report on Nov. 9, investors were concerned, as recent reports from other advertising-related companies showed sharp revenue declines due to a weakening economy. Most painted a gloomy picture of the ad market, from larger ad platforms like Meta Platforms to smaller ad venues like Snap. Alphabet‘s Google saw its third-quarter 2022 ad revenues drop to 2.5% year over year growth from 43% year-over-year growth in Q3 2021.
But The Trade Desk had good news for investors, producing 31% revenue growth in Q3 2022 — a sign that it is outperforming its peers and grabbing market share. And unlike some rivals, the company has a long history of profitability and is free-cash-flow-positive.
Image source: The Trade Desk.
It produced a Q3 2022 adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $163 million, with a margin of 41%. In addition, its trailing-12-month free cash flow of nearly $485 million is up 53% from a year ago.
Finding a much better financial performance from a technology company in this terrible environment is a fruitless effort.
As television viewing shifts rapidly from traditional broadcast, satellite, and cable TV to streaming content across the internet on connected TVs (CTVs), advertisers have been following those consumers to streaming platforms.
Data gathered by market data company Statista shows an estimate that U.S. CTV ad spending will grow from $14.2 billion in 2021 to $38.8 billion in 2026, an explosive 22% compound annual growth rate. And there’s more. Until now, The Trade Desk relied on the U.S. and a few other English-speaking markets. However, according to CEO Jeff Green, CTV spending grew faster in most of its international markets than it did in the U.S. in Q3. CTV adoption is now a global phenomenon, not just a U.S. one.
The company is already signaling to investors that the next leg of growth is in Asia, as management held its Q3 earnings call in Singapore. Asia is attractive for The Trade Desk as it combines the largest emerging middle-class population with advertisers who need to reach these consumers through CTV, over the internet, and on mobile. The best part is that the company made early investments in Asia that should provide a bountiful harvest in future years.
The key to effective online advertising is identifying the viewer so that advertisers can pinpoint people likely to be interested in their products or services. The problem is that old ways of identifying people online, like third-party cookies, violate people’s privacy and powerful platforms like iOS, Chrome, and Android are shutting down ways to identify people that violate privacy.
Google, for instance, is ending third-party cookie use in 2024 over privacy issues. While that seems reasonable, Google is using the elimination of cookies to introduce a proprietary identity solution named Topics that restricts competing advertising platforms from valuable advertising data. To remain competitive, The Trade Desk needs a successful open-source identity solution of its own, and it thinks it has one with UID2.0, which converts email addresses to anonymized IDs.
UID2.0 is also the foundation of The Trade Desk’s effort to build one of the world’s largest advertising data marketplaces. Look for how UID2.0 progresses in the future as the success of this identifier is necessary for The Trade Desk to thrive. Management has said it expects full adoption by the market in 2023.
The stock is trading at a price-to-sales (P/S) ratio of 17.34, against the computer processing and cloud services industry’s P/S ratio of 3.57. So, investors value this stock more highly than its cloud peers, as it has the best growth drivers and they expect more from it. Things to look bright, and if you can stomach the current turbulent market, few investments have better prospects over the next five to 10 years.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Rob Starks Jr has positions in Alphabet (A shares) and The Trade Desk. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., and The Trade Desk. The Motley Fool has a disclosure policy.
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