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Motley Fool Issues Rare “All In” Buy Alert
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Although The Trade Desk (TTD -1.60%) has the best fundamentals in the ad tech industry, it has been unable to avoid the rate-driven sell-off in ad tech stocks since the beginning of the year. Additionally, with many advertising companies reporting an ad spending slowdown in the June quarter, investors have been less than enthused about the whole advertising sector. Finally, with many economic experts predicting a recession by 2023, you might wonder if you should avoid all advertising stocks too.
Here is one reason why buying The Trade Desk today could be a wise investment decision.
The Trade Desk helps agencies and advertisers purchase digital advertising space through its self-service, automated ad-buying platform. It generates revenues by charging its advertising clients a platform fee based on a percentage of total ad spend. The company also generates revenues from data and other value-added services.
According to market research company Enlyft, The Trade Desk is already No. 1 in advertising campaign management, ahead of MediaMath and Google Ad Manager, owned by Alphabet . And business data company Datanyze ranks The Trade Desk as the third-largest demand-side platform by market share. There are three reasons why The Trade Desk is poised to strengthen its top dog status in today’s environment.
First, it is one of the few companies managing to grow its free cash flow during this period. Free cash flow is a company’s money after paying its operating expenses and capital expenditures. Companies can use this money to pay dividends, pay down debt, hire more employees, and invest in growth initiatives.
Companies with positive and growing free cash flow during a downturn gain a considerable advantage over those without it. Thus, The Trade Desk gains a massive lead over any challengers that are free cash flow negative, competitors that cannot adequately invest in their future because of a lack of cash.
By the end of the June quarter, The Trade Desk managed to grow its free cash flow above 50% over the last year to reach $476 million on a trailing-12-month basis — giving it financial flexibility.
TTD Free Cash Flow data by YCharts
In addition to solid cash flow, the company has a strong balance sheet with $1.21 billion in cash and short-term investments, with no long-term debt.
Second, The Trade Desk is a disciplined investor, regardless of the operating environment, meaning the company tends to avoid being overly aggressive in its investments, even during good times. According to its management, many of The Trade Desk’s larger ad-tech peers, with far more resources, are now pausing hiring or cutting investments because those companies invested too aggressively during good times. In contrast, because it remained disciplined and did not invest beyond its means, The Trade Desk can now continue hiring and investing throughout this downturn.
Third, frustrated by questionable integrity, opaque ad bidding, and draconian rules, marketers are beginning to turn away from dominant closed advertising ecosystems (walled gardens) that have controlled online advertising for the last decade. These walled gardens include Facebook, owned by Meta Platforms, which dominates social media, and Google, which dominates search.
Instead, marketers are moving ad dollars to video streaming platforms on connected TV (CTV). One significant advantage of CTV ads is that no platform is big enough to be as dominant in CTV as Google has been with search. This lack of a walled garden in CTV means the advertising marketplace is open, fair, and highly competitive — which is attractive to advertisers. As a result, marketing companies are starting to choose CTV over Google and Facebook when considering ad buys using digital media.
When advertisers move ad dollars to CTV, it aids The Trade Desk in taking ad market share from the walled gardens, as streaming video is its fastest growing and largest revenue channel, representing a low-40s percentage share of its revenues.
The Trade Desk Chief Executive Officer Jeff Green said during its second-quarter 2022 earnings call that the company is not immune to a poor macro environment. And considering that this company trades at a high valuation relative to the S&P 500, its stock could drop significantly at the first sign that its fundamentals are deteriorating.
However, this company could also thrive should the economy turn lower. For example, during the two-month COVID-related downturn in 2020, The Trade Desk gained significant market share by saving marketers money while increasing the effectiveness of its client’s ads. These characteristics are desirable when advertisers must make the most of every advertising dollar.
Green believes the company has already gained more market share than at any period in company history in the first half of 2022. Because of its growing industry dominance, investors picking up a few shares of The Trade Desk today could look very wise in three to five years.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Rob Starks Jr has positions in Alphabet (A shares), Roku, and The Trade Desk. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., Roku, and The Trade Desk. The Motley Fool recommends Criteo. The Motley Fool has a disclosure policy.
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