After falling 59% from its all-time high despite reporting strong top-line growth last year, The Trade Desk (NASDAQ:TTD) stock now looks attractive. Being a top-notch, pure-play digital ad-buying platform, the stock has a long way to go. Riding on the growth of the digital advertising space, the company could attain more scale as well as higher profitability in future years.
Digital Advertising Growth is a Catalyst
The digital advertising space is in its growth phase and presents a huge opportunity. In fact, digital advertising in the retail space alone grew by 26% year-over-year in 2021. According to The Trade Desk, one-third of U.S. consumers use online & offline information to help them make their purchases, highlighting the importance of marketing.
While digital ad market growth decelerated in 2022, it is expected to recharge in 2023 and beyond. According to forecasts made by Insider Intelligence, digital ad spending will grow 10.5% in 2023 and report double-digit annual growth over the next few years.
The Trade Desk has a huge competitive advantage that will enable it to capture a sizable percentage of digital advertising growth. TTD has a sturdy platform wherein companies can put forward their ads across multiple connected devices ranging from smartphones to smart TVs. Plus, The Trade Desk has an edge in the world of digital ads through its unique, target-based online identifier called Unified ID 2.0.
Unified ID 2.0 enables companies to deliver targeted ads that are relevant to end users. It eliminates the need for the tracking of cookies, thereby enhancing user privacy. It’s no wonder then that the feature has become increasingly popular and is being used by many well-known companies like Disney (NYSE:DIS), Walmart (NYSE:WMT), and The Washington Post, to name a few.
Impressive Q3 Results Highlight TTD’s Strength
The Trade Desk reported impressive top-line growth in Q3. The company reported sales growth of 31% year-over-year to $395 million. This is in sharp contrast to many tech companies that either reported declining revenues or strongly decelerating revenue growth due to an overall business slowdown.
On the profitability front, too, The Trade Desk has shown resilience. Q3 adjusted net income increased by 45% to $129 million ($0.26 per share).
It is worth noting that while most of the juggernauts in the tech sector have engaged in layoffs to cut costs, Trade Desk has not resorted to the same. This is reassuring and reflects that the company is in a better space and is efficiently managing its costs.
In addition, TTD reported impressive customer retention of more than 95% for the eighth consecutive year.
For Q4, the company expects to report revenue growth of 24%. This is commendable given the current macro climate as well as the single-digit revenue growth forecasted by other companies in the same industry.
TTD’s Valuation Looks Attractive
Currently, TTD shares are selling at 15.4x sales – much lower than their five-year price-to-sales average of 23.5x, reflecting a 34% discount. In fact, the stock was trading at a P/S ratio of around 40x in 2021 before the tech sell-off began.
Investors should reward companies like The Trade Desk, which has shown strong growth and continues to have bright prospects, with a premium valuation.
It’s worth noting that the company reported strong free cash flow in its first three quarters of 2022 (with Q4 yet to be reported). During the nine months ended September 2022, free cash flow nearly doubled to ~$334 million compared to the prior-year, which is impressive.
Is TTD Stock a Buy, According to Analysts?
The Wall Street community is clearly optimistic about the stock. Overall, TTD stock commands a Strong Buy consensus rating based on 11 Buys and three Holds. The Trade Desk’s average price target of $63.93 implies 35.9% upside potential from current levels.
Conclusion: TTD Looks Attractive for the Long Term
In the short term, TTD’s stock price could remain range bound depending on the strength of the expected recession. Longer term, however, the risk-reward profile looks favorable, and the company’s sturdy business platform will allow it to capture a greater share of the digital ad sector.
Given its robust prospects, cheap valuation, and impressive cash flows, I will buy the stock at current levels.
