Returns as of 03/19/2022
Returns as of 03/19/2022
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On March 15, the Nasdaq Composite index officially opened in bear market territory. The index is now down nearly 20% since the start of the year, driven by many tech stocks that have fallen 30% or even 40% in 2022 alone.
The Trade Desk ( TTD 5.20% ) is one of those companies, falling more than 42% year to date and 52% from its all-time highs. That being said, there is a lot to love about this advertising technology (adtech) stock. The company makes it easier for advertisers to place ads digitally. Since digital advertising is gaining popularity because it is easier to target a specific audience and monitor the success of an ad, The Trade Desk is poised to grow over the coming decade.
Image source: Getty Images.
The Trade Desk is the top-dog on the demand side of the adtech space, with no major competitors. There are sell-side players like Magnite and PubMatic, but those are not competitors. Rather, they are partners: Sell-side players help the publisher (the company selling the ad space) get the best bang for their buck by working with The Trade Desk to find the best advertiser to publish ads on the platform. The Trade Desk had $6.2 billion spent on its platform in 2021, which was 47% higher than the year-ago period and shows how dominant it is in the space.
It doesn’t have much competition because of its network effects. With every transaction it facilitates on its platform, The Trade Desk receives data on ad engagement and viewership. It can then use this data to recommend where advertisers should place ads to reach their target audiences in the future. That makes The Trade Desk’s platform more valuable to its customers, which attracts more activity and, thus, brings more data. With its leadership, the company has the most data to give the best recommendations for its customers.
What makes this advantage special is that it would be incredibly difficult for any competing platform to catch up since there are few incentives to convince advertisers to move away from The Trade Desk. The company’s customer churn of less than 5% for the last eight years indicates the platform’s strong stickiness.
As a result of these advantages, the company has become very profitable. In 2021, The Trade Desk brought in nearly $138 million in net income and over $318 million in free cash flow. Importantly, the company has been investing these strong cash flows back into its business to provide even greater value to its customers, extending its leadership.
The Trade Desk’s investment level in 2021 was heavy; the company dove headfirst into its Unified ID 2.0 (UID2) offering — which is becoming the industry’s cookieless solution for targeted advertising. Cookies have been a controversial way to target consumers, sometimes breaching privacy to do so. Now, big companies like Apple and Alphabet are outlawing cookies, so this shift for The Trade Desk was a necessary one, and the company is embracing it.
UID2 is now one of the industry-leading open-source solutions to collect pseudonymous data about consumers — meaning advertisers can effectively target consumer cohorts without compromising the consumer’s identity. UID2 gained 16 new partners in 2021, and this will likely only go up from here. It is open-source, meaning it is free to use, but The Trade Desk still collects data from transactions and uses it to enhance its platform.
While the company is an industry leader today, the market ahead is still massive. The company’s $6.2 billion spent on its platform in 2021 is peanuts compared to the $725 billion in annual global ad spending, and digital advertising’s share of this will likely expand rapidly over the coming years.
Shares have been trading at expensive valuations the past few years, but this drop is providing a better price. Shares now trade at 22 times sales — a high price but its lowest valuation since early 2020. For an industry leader with major competitive advantages and tons of growth ahead, these prices look appealing. If the valuation scares you, consider dollar-cost averaging into a position, but this stock seems like one that every investor should own for the next decade.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 03/19/2022.
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Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns as of January 1, 2021.
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