Why The Trade Desk Is A Buy, Set, And Forget Stock
Summary
- Investors should accumulate TTD stock on weakness.
- Nasdaq selling frenzy hurting stock performance.
- Catalyst discussed.
- I do much more than just articles at DIY Value Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
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The Nasdaq’s unexpected selling pressure is accelerating. At the time of writing, the index is down by almost 8% from all-time highs. Bears managed to erase half of the summer’s rally and are taking good companies down with it. The Trade Desk (NASDAQ:TTD) is one such company.
TTD stock is a stock that investors may buy, set, and forget. This is synonymous with buying and never selling.
Why?
The software applications firm does not trade at favorable valuations and is vulnerable to the stock market selling. Just as readers picked the bottom in mobile advertising firm Digital Turbine last year, TTD stock offers similar rebound potential.
Selling Pressures TTD Stock
After posting second-quarter results that beat estimates, The Trade Desk shares slumped. Investors glossed over the revenue growing by 100.9% Y/Y to $280 million. Net income also nearly doubled to $47.7 million. Its poor value gives markets an excuse to sell the stock:
Data from Seeking Alpha Premium
TTD’s connected TV is a catalyst. Chief Executive officer and founder Jeff Green said customers view its demand-side platform as the default for the open internet. He said, "Nowhere is this more apparent than in Connected TV, as more premium streaming inventory becomes available to meet growing marketer demand for data-driven TV advertising."
On the conference call, the CEO said its CTV footprint is expanding asymmetrically. For example, with Ford (F), advertising reach is anything but linear. Since its CTV campaigns directly target households, the advertiser may pitch relevant ads that are relevant “to the time and place that the ads are being consumed.” This marketing precision sets TTD apart from all its competitors. More importantly, advertisers do not get this marketing precision on linear or broadcast television. As viewers migrate away from that channel, TTD’s addressable market expands.
I would estimate that global advertising on the open internet is worth at least $400 billion in the next 10 years. This is above the estimate offered from the Statistica's forecast for the U.S. market. It estimated the CTV ad spend is worth $27.47 billion by 2025.
Using my estimate, the firm could post $40 billion in annual revenue at a 10% take rate and $80 billion at a 20% rate.
Risks
A shrinking economy would hurt the advertiser budget. Online giants like Facebook (FB) and Google (GOOG) are down sharply. Investors are penalizing Facebook for company-specific problems. Still, markets are selling FB and GOOG stock in anticipation of lower advertising spend. Sellers may reason that TTD faces slowing ad spend, too.
The television ecosystem will get more crowded and competitive. TTD will leverage its strong partnerships with content owners. By avoiding competition with content suppliers, The Trade Desk will avoid unnecessary competition.
Opportunity
TTD will more than compensate for any ad spending budget cuts. Brands are shifting their TV budgets to the data-driven precision of CTV. The company is already working with companies in the automotive and food industries. It supplies measurable results from exposure to purchase. This level of support will attract more advertisers to its platform.
TTD continued to attract some of the world’s largest advertisers who are embracing the open internet. As their investments pay off, they will migrate away from ecosystems that run having walled gardens. In Q2, TTD earned 18 cents a share (non-GAAP). Its adjusted EBITDA of $117.94 million easily beat the $84 million guidance. In Q3, TTD expects revenue of at least $282 million. Adjusted EBITDA will rise to $100 million.
TTD will accelerate its growth through international expansion. In EMEA, CEO Green said that CTV grew 11x year-over-year. It led the U.S. and Australia as the countries entered the pandemic. During that time, it benefited from the accelerated adoption of growing online viewership. That momentum continued in Germany, the UK, France, Spain, and Scandinavia. TTD investors who saw Zoom (ZM) fall in the post-pandemic scenario are worried. As long as The Trade Desk wins more contracts worldwide, it may even beat its anticipated growth rate.
Technical Chart
The moving average convergence divergence or MACD confirmed the TTD peak in August. Notice the MACD peaks falling as the stock rose between July 1 and Aug 2:
Cautious investors may wait until the negative MACD eases before starting a position.
Your Takeaway
The Trade Desk offers advertisers a high return on investment in the CTV space. Risks of the economy slowing due to inflation and uncertainties will only lift this company’s prospects. Advertisers will re-evaluate their advertising budget allocation. When they realize that The Trade Desk offers strong, measurable, and positive results, they will spend more on the platform.
TTD is a stock that investors should accumulate on weakness. Given the multi-year revenue expansion ahead, shareholders should think twice before selling the stock.
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This article was written by
Individual investor with three decades of experience who runs DIY Value Investing.
Affiliate partner at StockRover.Chris (diyvalueinvestor@gmail.com) is an Hon B.Sc graduate (with distinction) in Science and Economics. He holds a PMP (Project Management Professional) designation.
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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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