Following its impressive recent performance, is The Trade Desk a worthwhile investment opportunity?
Technology is transforming every aspect, even advertising. Nowadays, algorithms run the show when it comes to marketing in the digital realm. This is particularly true for ads shown on streaming platforms, websites, and mobile apps.
Here's how it works. An advertiser teams up with a supply-side platform (SSP) to set up a campaign, specifying budgets, objectives, and target audiences. Then, whenever users are streaming content or browsing websites with ad slots, this information is relayed to the SSP. The SSP then places real-time bids on the ad space on behalf of the advertiser, securing a spot for their ad. The process is so swift that we remain oblivious to it.
This streamlined approach enhances the effectiveness of digital advertising by reaching specific audiences, tapping into a wider market, and utilizing data to tweak campaigns. Many predict that all advertising transactions will eventually shift to the digital sphere, placing companies like The Trade Desk (TTD) in a prime position to dominate a huge, expanding market.
Staggering success
The most straightforward method to apprehend The Trade Desk's recent success is to scrutinize its soaring revenue figures.
In Q3, the company's sales surged by 27% to reach $628 million. Management anticipates $756 million in sales for the current quarter. Connected TV devices, such as smart TVs, Roku, and Amazon Fire TV, contribute substantially to the company's revenue, allowing it to partner with leading streaming services. The Trade Desk currently serves 120 million connected TV devices, which explains why advertisers flock to the platform and why it boasts a 95% client retention rate.
The Trade Desk also generates copious unencumbered cash flow, is profit-generating, and boasts a strong financial statement. During the past 12 months, it yielded $520 million in unencumbered cash flow (FCF) and $0.61 in diluted earnings per share, with a substantial FCF margin of 22.5%. Its financial statement reveals $4.8 billion in current assets versus $2.6 billion in current liabilities, signifying a substantial working capital of $2.2 billion.
Is The Trade Desk stock a worthwhile investment?
The company is financially robust, enabling it to support its growth initiatives like global expansions. Currently, just 11% of The Trade Desk's sales come from outside North America; however, a staggering 67% of the worldwide advertising expenditure is spent internationally. This is a colossal, unexplored market for The Trade Desk. Its international sales have yet to flourish, so management must demonstrate its capacity to drive international sales.
The Trade Desk competes with financial heavyweights like Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Microsoft (NASDAQ: MSFT), but its performance remains impressive despite this. The digital advertising market remains vast and expanding.
Given that the market is near its all-time high, few stocks are inexpensive at the moment, and The Trade Desk is not among them. It is trading at over 28 times sales at the time of this writing.
This is significantly above its historical average, although it is a lower ratio than it was during the 2021 tech bubble. Nevertheless, this is a significant valuation.
If you wish to invest, though, there are strategies that can help minimize the risk of paying too much. Dollar-cost averaging -- investing in shares at regular intervals regardless of their price -- is one credible approach. Another strategy to consider is waiting for a dip and then buying at a discount. The bottom line: The Trade Desk is a remarkable company, but its expensive valuation means investors should consider strategies to mitigate the risk of overpaying for its stock.
Investing in The Trade Desk (TTD) could be a promising move due to its strong financial performance and expanding market opportunities. The company's Q3 sales increased by 27% to $628 million, and management anticipates $756 million in sales for the current quarter. TTD's success is also driven by its substantial revenue from connected TV devices and a high client retention rate. However, given its high valuation of over 28 times sales, investors might consider strategies like dollar-cost averaging or waiting for a dip before purchasing shares to mitigate the risk of overpaying. In the realm of digital advertising finance, investing in companies like TTD that leverage advanced technologies and data analysis could yield substantial returns in the long term.
