The Trade Desk: Moving Higher, Getting More Expensive (NASDAQ:TTD)

Summary

The Trade Desk has seen an excellent year in 2019, delivering far stronger results than anticipated.
The company guides for continued growth in 2020, yet multiples have only increased with shares being on a tear again in 2019.
Still admiring the company a great deal, I recognise that expectations have only increased over time.
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The Trade Desk (NASDAQ:TTD) continues to defy the law of gravity as the operational performance remains off the chart. A year ago I looked at the company after it reported its 2018 results, concluding that the company was not just delivering on growth, it was delivering on accelerating growth as well.

I concluded that the company remains one of the most impressive growth stories out there. While recognising that the company might be conservative in its guidance for 2019, I could not put myself to chase the shares following that momentum run, despite the great prospects.

The Former Thesis

The Trade Desk is a great growth story as it has developed a platform through which advertising buyers send messages to consumers, essentially creating a huge real-time advertising marketplace. These services are in great demand as buyers look for the best ROI on their advertising budgets, as even concerns relating to personalisation, privacy and the Facebook (FB) scandal did not have a real impact on the growth story.

While I was very impressed with the performance, I unfortunately have been scarred by the painful implosion of Rocket Fuel, which was a somewhat similar business a few years before. Another concern was that the "cut" of The Trade Desk was very large. For every dollar on advertising spent on the company's platform, the company generated 20% in sales.

Trading at just $23 in the autumn of 2016 after the public offering, with the company valued at just 4 times sales, shares looked compelling. After all, the company was growing sales by 80% per year, while the company was profitable already. On the back of continued growth and low multiples, shares hit the $100 mark in the summer of 2018. Shares rallied to $200 in February of last year as the company reported strong 2018 results and provided a strong outlook for 2019.

The company reported a 56% increase in fourth quarter sales with full year revenues hitting $477 million, as quarterly sales hit $160 million. The company reported net earnings of $39 million for the quarter and $88 million for the year, marking quite impressive margins of course. With a large share count, full year earnings came in at just $1.92 per share.

Despite a net cash position of $4 per share at $200, operating assets were valued at 100 times earnings. That is a rich multiple as margins are quite high already, despite the great outlook. The other concern was that the "cut" was steep. The revenue base in 2018 was equal to 20.3% of the $2.35 billion being spent through the platform.

The company guided for 2019 gross spend of $3.2 billion or more, marking at least a 36% increase in gross spend. The company guided for 2019 revenues at $637 million or more, marking at least 34% growth compared to 2018. Somewhat concerning is that adjusted EBITDA margins were set to fall from 33% of sales to about 29%, suggesting some real margin pressure.

Trading at 14 times sales and a sky-high earnings multiple, I was very cautious on the immediate outlook given the momentum run seen already, although I recognise that I have underestimated the company quite a few times already and probably should have been involved in this long-term value creator a long time before.

What Happened?

The spoiler alert is that shares have rallied from $200 this time last year to about $300 currently, marking another year of very impressive returns for investors. After a 41% increase in first quarter sales, the company hiked the full year guidance by $8 million to $645 million or more. With second quarter sales growth accelerating a point to 42%, the company hiked the full year revenue guidance another $8 million to at least $653 million. Despite growth slowing down to 38% in the third quarter, the company hiked the full year guidance another $5 million and in fact leverage was seen with the EBITDA guidance being hiked more than the sales guidance.

What becomes apparent now is that 2019 was a great year even as fourth quarter sales growth slowed down to 35% with full year revenues amounting to $661 million. While these results are very strong, GAAP earnings only rose from $1.92 to $2.27 per share as the $3.69 non-GAAP earnings per share number is not that meaningful with the difference entirely resulting from stock-based compensation expense, a very real expense to shareholders of course.

With net cash amounting to $5 per share at $300, operating assets are valued at $295, or 130 times net earnings. Of interest is that the ratio of revenues to gross spend actually increased a bit towards 21% the past year. While 2020 is set to become another good year with revenues seen above $863 million, which suggests at least 30% revenue growth, the outlook is arguably good. Note however that with margins anticipated to be stable, shares trade around 100 times forward earnings, hence valuation multiples have only increased over the past year.

Furthermore, I note that third and fourth quarter growth rates are not that much higher than the percentage growth sales guidance for 2020, indicating that unlike other years, the guidance might not be as conservative as it was in the past. After all, the full year 2019 revenue growth number of 39% was 6 points better than guided for at the start of the year. Note that growth rates at the end of 2018 came in at the mid-fifties, as the current pace of growth hardly comes in above the sales guidance for 2020.

Despite my appreciation for the company, its outlook and management team, I feel that the risks to the valuation are only on the increase, taking into account that the general market has offered some opportunities as well over the past week.

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This article was written by

The Value Investor

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The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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