The Trade Desk: High-Growth Digital Advertising Stock Outperformed
The Trade Desk, Inc. (NASDAQ:TTD) investors who bought into its August selloff were rewarded, as the stock reached a new 2024 high last month. TTD's robust Q2 earnings release likely assured investors about the robustness of its high-growth opportunities in programmatic digital advertising.
Accordingly, The Trade Desk recorded revenue growth of 26%. The company also registered an adjusted EBITDA increase of almost 35%, demonstrating remarkable operating leverage. Compared to its advertising industry peers' forward revenue growth and earnings growth estimates, TTD's ability to outperform significantly validates the sustainability of its business model.
Notwithstanding its high-growth premium, The Trade Desk's ability to generate high free cash flow margins (FY2024 estimates: 27.4%) corroborates its market leadership in the programmatic buying space. As a result, it has likely spurred more confidence in TTD investors as the company looks to exploit the assessed $1T in TAM for digital advertising.
In my previous article, I upgraded my TTD thesis as I reassessed its ability to sustain its market leadership. I explained why I was too cautious, as the company is well-positioned to capitalize on the shift away from the walled gardens and gain market share. The stock's relative outperformance against the S&P 500 (SP500) since my previous update validates my upgrade, demonstrating the market's confidence.
The Trade Desk's Growing CTV Ambitions
The Trade Desk emphasized that in an increasingly data-driven ad-buying landscape, CMOs must leverage programmatic digital advertising strategies from leading players like TTD to scale their ROAS. In addition, as macroeconomic conditions have weakened further, given the high interest rates over the past two years, the scrutiny on marketers to justify their budgets has intensified. Therefore, I assess TTD's market dominance as the leading demand-side platform of the open internet should help broaden adoption with more customers.
TTD's leadership is increasingly predicated on the continuing success of CTV advertising. As a result, CTV's growth potential is assessed to be increasingly pivotal toward sustaining the company's growth prospects against its legacy peers. Management enunciated that the "cheap reach" of traditional advertising is increasingly less relevant in the evolving digital advertising landscape. Given the emergence of first-party data, marketers must harness their ability to leverage them in anticipation of Google's eventual deprecation of third-party cookies.
Moreover, traditional advertising relies on strategies that are often "imprecise," leading to potentially less efficacious execution. It's in stark contrast to higher accuracy assessed in CTV advertising, affording marketers with more precise targeting and measurement metrics. With the integration of TTD's UID2 identifier, it should bolster its customers' efforts to capitalize on the significant value of first-party data across its digital advertising ecosystem while enhancing privacy controls.
There are valid concerns about whether emerging big tech players like Amazon (AMZN) could be an increasingly significant threat to TTD's market leadership. Amazon has likely assessed streaming as a crucial ad growth vector, helping extend its retail media advertising leadership. Therefore, investors should anticipate potentially more aggressive strategies by Amazon as it looks to shake out the CTV space. Its massive war chest suggests it can afford to spend more aggressively to capture the necessary audience metrics and intensify the competitive pressure against smaller peers like TTD. Despite that, TTD's growth potential in the CTV space remains robust. The recent earnings release on YouTube (GOOGL) (GOOG) suggests its growth has decelerated. However, TTD still faces significant competitive threats against big tech companies keen on entrenching their dominance in the massive digital advertising market.
However, the company isn't resting on its laurels. It has expanded its retail media partnerships and improved advertiser metrics through its proprietary Kokai platform. Accordingly, management indicated that Kokai leverages AI effectively to help improve reach and ad spending metrics. As a result, "incremental reach is up more than 70%" on Kokai, while CPA has "improved by about 27% as data elements per impression have gone up by about 30%." Therefore, it positions The Trade Desk well in the highly competitive programmatic buying landscape.
Moreover, TTD is reportedly developing its smart TV OS, potentially bridging the gap and forging a stronger partnership with TV device makers. It's an exciting undertaking, as it looks to compete more aggressively against CTV platform leaders like Roku (ROKU). While the developments are still nascent, they underscore management's acknowledgment that the company needs to justify its high-growth profile, given its relatively expensive valuation.
TTD Stock: Very Expensive For What It's Worth
TTD's "F" valuation grade over the past six months suggests it has consistently been priced for growth. Wall Street estimates on The Trade Desk have been upgraded, bolstering the stock's recent buying optimism.
Moreover, several "A" range factor grades corroborate the market's optimism. Investor sentiments are likely underpinned by its fundamentally strong business model ("A-" profitability grade) and its ability to gain market share against its slower-growing advertising peers.
Notwithstanding my optimism, caution on the stock cannot be understated, as the market reflects its high-growth profile. TTD's forward adjusted PEG ratio of 2.6 is more than 90% over its sector median. Therefore, it's imperative for the company to execute its CTV ad strategy very well while diversifying through its retail media partnerships.
Is TTD Stock A Buy, Sell, Or Hold?
TTD's price action indicates it remains in a robust medium-term uptrend bias. My assessment is supported by the stock's "A-" buying momentum grade over the past six months. Therefore, it indicates solid dip-buying opportunities at steep pullbacks, underpinned by its fundamentally strong business model.
Despite that, I've also assessed the inherent volatility in TTD's price action over the past year. Given its expensive growth premium baked into its valuation, profit-taking opportunities will likely continue to intensify selling pressure at critical resistance zones.
I've assessed that TTD appears to have broken above its $100 resistance level, bringing it closer to its $114 all-time high recorded in late 2021. The stock is overbought now, suggesting waiting for a possible pullback before adding further might be prudent.
However, I have not assessed red flags in its price action, although its expensive valuation must be considered, especially since the stock is already overbought.
With that in mind, I believe it's timely for me to move back to the sidelines as we await another more attractive dip-buying opportunity to pounce.
Rating: Downgrade to Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing, unless otherwise specified.
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