Is the Trade Desk a buy it now?

Shares of The trading post (NASDAQ: TTD) closed at a record high of $111.64 last November. But as of this writing, shares of the ad-tech company are trading just above $50.

Like many other growth stocks, The Trade Desk’s stock has fallen over the past six months as rising interest rates and other macro headwinds sparked a retreat into more conservative investments. But does this decline represent a good buying opportunity for long-term investors?

Image source: Getty Images.

What does The Trade Desk do?

The Trade Desk operates the world’s largest independent demand-side platform (DSP) for digital ads, which enables ad agencies, advertisers and trade desks to bid on programmatic ad inventory and manage their own advertising. DSPs stand opposite to the advertising supply chain as sell-side platforms (SSPs) like magnite (NASDAQ: MGNI)that help publishers and digital media owners manage and sell their own advertising inventories.

The Trade Desk served over 1,000 clients in its last quarter while maintaining an impressive retention rate of over 95%. It primarily serves advertisements from mobile, desktop and connected television (CTV) platforms.

The company’s new platform, Solimar, helps advertisers navigate the latest privacy updates from Apple and Alphabetfrom Google by developing advertising campaigns with their first-party data (information collected directly from customers). It also adopts a newer technology called Unified ID (UID) 2.0, which eliminates the need for third-party cookies.

These upgrades bolster its mobile and desktop ads, but it currently derives most of its growth from its CTV business, which is growing rapidly as linear TV platforms fade and Ad-supported video streaming attract more viewers. In 2021, its number of advertisers spending more than $1 million on CTV ad campaigns nearly doubled from 2020.

During the company’s most recent conference call, CEO Jeff Green pointed out that he had spent “most of the past 10 years publicly predicting that netflix (NASDAQ:NFLX) and almost everyone would end up running ads,” a prediction that finally came true earlier this year with Netflix’s reluctant decision to launch an ad-supported tier.

How fast is The Trade Desk growing?

Trade Desk revenue grew 26% in 2020 as the initial impact of the pandemic strangled ad sales globally. But in 2021, its revenue rose 43% to $1.2 billion as lockdown measures were eased. Its adjusted net income in 2021 increased 36% to $456 million, and its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 77% to $503 million for the year, which which increased its adjusted EBITDA margin for the whole of 2021 from 34% to 42%.

In the first quarter of 2022, revenue grew 43% year over year to $315 million, its adjusted net income increased 50% to $105 million and its adjusted EBITDA jumped 70 % to reach $121 million. This overall growth was impressive, given the difficulty of year-over-year comparisons:

Period

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Revenue growth (YOY)

37%

101%

39%

24%

43%

Adjusted EBITDA growth (YOY)

81%

708%

59%

25%

70%

Adjusted EBITDA margin

32%

42%

39%

48%

38%

Data source: The Trade Desk. YOY = year after year.

In the second quarter, it expects revenue to grow “at least” 30% year-over-year to more than $364 million, and adjusted EBITDA to grow about 3% to reach $121 million (implying an adjusted EBITDA margin of $33 million). %). Again, these growth rates are very high compared to its triple-digit growth rates in the prior year quarter.

He is seeing strong growth in travel, pets, food, beverage and shopping in a post-lockdown market, and he expects the upcoming U.S. midterm elections to generate additional favorable winds until the end of the year. It only generates a single-digit percentage of its revenue in Europe, which limits its exposure to the Russo-Ukrainian war, and it doesn’t grapple with supply chain disruptions like Magnite.

A solid outlook with a premium valuation

The Trade Desk gave no specific guidance beyond the second quarter, but analysts expect its revenue and adjusted EBITDA to grow 33% and 23%, respectively, for the whole of the year. Based on those expectations, its shares are trading at 16 times this year’s sales and 41 times its adjusted EBITDA.

Magnite – which is growing at a slower rate on a pro forma basis (which smooths its recent acquisitions) – trades at just three times this year’s sales and seven times its adjusted EBITDA. Therefore, The Trade Desk’s near-term growth could be capped by its premium valuations.

However, I believe The Trade Desk’s high growth rates, stable adjusted EBITDA margins and balanced exposure to the growing CTV advertising market still make it a good long-term investment. I would happily buy stocks at these levels, but I would also keep some of my dry powder at the average should a stock market crash further compress its valuations.

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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Leo Sun has positions in Alphabet (A shares), Apple and Magnite, Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple, Magnite, Inc, Netflix and The Trade Desk . The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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