The Trade Desk (NASDAQ:TTD) is a fast-growing tech company that helps ad agencies and marketers optimize their digital ad spend. Listed in 2016, it has had a good run with revenue more than tripled while net profit surged by more than 500%. These numbers are impressive, but I think its best days are yet to come.
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Solid execution
Founded in 2009, The Trade Desk has grown by leaps and bounds over the years. In the last five years alone, revenue was up by 481% to $661 million -- a compound annual growth rate (CAGR) of 55%. Net profit attributable to shareholders performed even better, up by a CAGR of 87% to reach $108 million.
Such financials are remarkable considering that many of its high growth peers (some with significantly higher revenue and bigger scale) have trouble to even breakeven. The Trade Desk, on the other hand, has been profitable since 2013.
Many factors contributed to The Trade Desk’s strong track record. For one, it is fanatically focused on making its customers (ad agencies and their respective customers) successful. By offering a transparent, and data-driven platform, it enables advertisers to put out the right ad in front of the right consumers. This not only helps advertisers get better advertising outcomes but also allows them to maximize the value of their budget.
Moreover, the founder and CEO, Jeff Green has been an important force behind the company’s success. A veteran with significant advertising experience, Jeff exhibits several positive traits that I look for in a leader -- visionary, long term focused, well-established track record (before this he has founded the first online advertising exchange that was sold to Microsoft), and significant skin in the game (he owns about 6.3 million share worth more than $1 billion ). The Trade Desk has performed well under his leadership in the past and should continue to do so in the future.
Plenty of growth opportunities
In the recent fiscal year ended December 31, 2019, The Trade Desk reported that revenue was up by 39% year over year to $661 million, thanks to a 33% increase in gross spend on its platform to $3.1 billion. Despite its strong performance, the company’s share of global ad spending is less than 1% of global ad spending ($725 billion in 2019), giving it ample room for growth.
Notably, it is riding on two huge tailwinds -- the shift to digital advertising (practically anything that deals with the internet) and the transition to programmatic ad buying (buying ads online in real-time rather than through human negotiations)--which would probably last for decades. On top of that, the company’s aggressive expansion into overseas markets like Europe and Asia further expands its addressable market. To this end, it could leverage its existing customer relationships to grow in these new markets since many of them have operations globally.
Near term, however, The Trade Desk might face temporary challenges stemming from the COVID-19 outbreak. As businesses close their doors to help curb the spread of the virus, they might cut their ad spending to conserve cash. Thus, there is a risk that these cuts might impact the company’s growth rates in the near term. Despite, the tech company has guided for higher ad spend on its platform in 2020 of at least $4.24 billion (37% higher than that of 2019).
A word on valuation
Shares of The Trade Desk have declined significantly during the recent market sell-off. From its peak of $323.78 in February, shares are down by about 50%. Despite the drop, the stock is anything but cheap. It’s still trading at more than 70 times earnings .
On one hand, I would argue that The Trade Desk is a high-quality company that deserves a premium valuation. Yet, its steep price means that investors buying the stock now would have very little margin of safety. On balance, I would play it safe and keep the stock on my watchlist until its valuation becomes more attractive.
