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Shares of digital marketing company The Trade Desk (TTD) have had a stellar run in the month of July. Notably, shares of the company are up by more than 16% this month so far.
One of the key drivers for this impressive rally in the Trade Desk stock is its inclusion in the Nasdaq 100 Index. The advertising technology company will replace Activision Blizzard, the gaming company acquired by Microsoft.
Meanwhile, along with the Nasdaq 100 Index, The Trade Desk stock will also find a place in the Nasdaq 100 Equal Weighted Index and the Nasdaq 100 Ex-Tech Sector Index at the same time.
However, is that the sole reason for the recent rise in the stock? Moreover, has the rally in Trade Desk stock (up roughly 100%) in 2023 mean that its valuation is now unattractive? Or does the company’s fundamentals and future prospects is hinting at a further rise in the share price?
About The Trade Desk
The Trade Desk is a digital advertising company which focuses on real-time programmatic marketing automation technologies, products, and services, designed to personalize digital content delivery to users.
Founded in 2009, the Ventura CA-based company has 225 partners worldwide, employing more than 2,800 people in 25 locations worldwide.
Solid Fundamentals
The Trade Desk reported robust results for the Jan - Mar ‘23 period. In Q1, the company reported a 21% yearly rise in revenues to $383 million.
The rise in revenues can be attributed to the gradual but steady increase in digital advertising spending by enterprises as inflation is showing signs of cooling down.
Further, the company also reported a net profit of $9.3 million, compared to a loss of $14.6 million reported in the prior year. Notably, both revenue and earnings comfortably surpassed analyst expectations too.Meanwhile, the company’s cash-generating abilities from its operations also remained robust. Net cash provided by operating activities witnessed a yearly rise of 28.3% to $187.6 million in Q1 2023.
Moreover, the company is also debt free as of Q1. Also, the company’s management has aided the Trade Desk share price growth by repurchasing stock worth $293 million in Q1 with $407 million still left for repurchases as of March 31, 2023.
Moreover, its upbeat guidance for Q2 impressed analysts. In Q2, the company expects to generate revenues of $452 million, which is 1.43% above the analyst consensus.
Finally, the company maintained a customer retention rate of 95% during Q1, as has been the case for the past nine years which bears testament to its customer stickiness.
Diverse Customer Base and Exciting Partnerships
The Trade Desk has a diversified customer base with not a single industry having more than 20% share in its revenues. Health and Fitness (16%), Food and Drink (16%) and Automotive (11%) companies remain some of the major customers of The Trade Desk. This makes The Trade Desk less vulnerable to any industry-specific adverse developments.
However, a key enabler for growth for The Trade Desk can be the Unified ID 2.0 technology. The Unified ID 2.0 is a relevant advertising technology which puts user privacy at the core. This is a departure from the third-party cookies arrangement which made users’ privacy vulnerable to data breaches.
On the back of this technology, The Trade Desk has forged partnerships with some leading companies namely NBCUniversal, video viewing platform Rave and Paramount Advertising.
Meanwhile, the company has a huge reach in the growing Connected TV space with a presence in more than 90 million households and above 120 million Connected TV devices. This represents a huge market for the company as according to a report by data insights enterprise Statista, around 88% of American households owned at least one Connected TV device as of 2023.
Analyst Moderately Upbeat
For The Trade Desk stock, analysts are painting a somewhat positive picture for its future prospects.
For FY 2024, analysts are expecting the company to record an estimated earnings rise of 67.39%. Although the mean target price of $74.35 indicates a downside potential of about 15.5% from current levels due to the impressive rally in the share price witnessed in recent times, the price target may be revised upwards soon to reflect its true potential.
Meanwhile, analysts remain cautiously optimistic about the stock with a “Moderate Buy” rating. Notably, out of 19 analysts covering the stock, 10 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, 5 have a “Hold” rating and 1 has a “Strong Sell” rating.
However, the mean target price is $74.35, which is 15.5% lower than where the stock is currently trading.
Final Takeaway
Inflation is gradually but steadily showing signs of cooling down and the notable growth prospects of digital advertising in terms of the total global advertising spends (out of approx. $830 billion in total global ad spend, digital media is at a mere $135 billion) make The Trade Desk an attractive long-term investment. Moreover, operationally the company appears to be solid with strong revenue growth, and profitability and it is also debt free.
Lastly, its prominent position in the digital advertising space and partnerships with leading companies across a diversified customer base gives it a firm footing in the digital advertising market.
That said, at its current price I believe the stock is a Hold. In my opinion, much of this recent move in TTD, especially in the past couple of weeks, can be attributed to the stock being added to the Nasdaq indexes.
At current elevated levels, the stock is currently trading at rich valuations. This can be gauged from the fact that its key valuation ratios like Forward price to earning (PE) ratio, which is at 256.31, its price-to-book (P/B) ratio of 22.14, and Price-to-Cash Flow of 72.90. These levels are high compared to its peers.
So while I am a long-term bull, I think investors looking to initiate or add to their positions in TTD will be able to scoop up shares of the stock a lower prices in the not too distant future.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
