last posts

Is the Trade Desk too expensive for 2023?

techsm5

With the deluge of daily headlines, it can be difficult to keep our long-term investment goals in the right context, especially after tough years like 2022. But we don’t invest for one-year returns; we invest over time to achieve our financial goals. It is essential to continue to invest in a disciplined manner, such as averaging, even in times of market volatility. As the famous investor Warren Buffett says, “the most important quality for an investor is temperament, not intellect”.

The trading postit is (TTD -1.12%) the stock has fallen 50% in 2022, but is up 65% over three years and 826% over the past five.

This perfectly illustrates the adage that “time in market” is better than “market timing”. In other words, the best way to accumulate wealth in stocks is to buy and own great companies, not to try to time short-term price movements. Let’s take a closer look at whether The Trade Desk stocks are worth investing in for the new year.

What is The Trade Desk?

The advertising industry is competitive and dynamic. The last decade has seen massive change as mediums such as online video, connected television (CTV), display and retail have exploded. The big question businesses are asking is, “How can we reach our target audience effectively and efficiently?” The Trade Desk platform provides the solution.

The cloud-based platform provides advertising agencies and businesses with billions of omnichannel advertising opportunities, data used to reach target audiences (for example, if a business sells pet insurance, it should target pet owners to be effective) and visibility to track the effectiveness of campaigns through a user-friendly interface.

Connected TV (CTV) – any TV watched over an internet connection – is one of The Trade Desk’s main target areas. Nielsen reports that streaming TV viewership surpassed cable for the first time in 2022, and that trend is expected to continue.

Companies like netflix, which were previously ad-free, are moving to tiered subscriptions, with lower-cost tiers featuring ads. The Trade Desk partner companies currently have access to 90 million homes and 120 million CTV devices.

Another growth target is retail marketing, where stores sell advertising space on their websites, apps, or in-store displays. According to Statista, online ad spending was $77 billion in 2021 and is expected to double by 2024. The Trade Desk has partnered with walmart to create its Walmart Connect platform, as well as with Albertson, Walgreens, and others. This is fertile ground for The Trade Desk’s revenue, as retailers turn to its expertise to maximize their profits.

Great results, but is the price too high?

Trade Desk revenue exploded, as expected. Based on the company’s fourth quarter guidance (shown below), when 2022 results are released, they will have more than tripled since 2018.

The turnover of the Trade Desk from 2018 to 2022.

Data source: The Trade Desk. Table by author.

Many predict that advertisers will spend less in 2023 due to a potential recession, which will hurt The Trade Desk’s growth. However, advertisers looking for better value for money might find The Trade Desk’s targeted value-added approach a great option. Whatever happens in 2023, secular trends in CTV and omnichannel advertising favor The Trade Desk.

The Trade Desk currently has a market capitalization of $22 billion, or about 15 times sales. This price to sales (P/S) ratio is the lowest since the pandemic crash and early 2019 before that, as shown below.

PS TTD Ratio Chart

TTD PS Ratio data by YCharts. PS ratio = price to sales ratio.

Going forward, if the company grows sales only 25% per year (slower than any previous year) over the next two years, its annual sales will approach $2.5 billion and the P/S ratio will be lower even than its March 2020 crash. The Trade Desk also has over $1.3 billion in cash and investments and no long-term debt. These metrics suggest far greater long-term upside potential than downside risk at current valuation.

It is still vital for investors to understand that the stock could drop further in the short term. After all, it is impractical to predict the absolute bottom. So it’s best to build up a position slowly over time and branch out.

The Trade Desk exhibits many characteristics of a long-term winner with tremendous market opportunity, tremendous revenue growth and a strong balance sheet. The stock is trading at its most attractive valuation in years and deserves special attention from growth-oriented investors.

Bradley Guichard holds positions in the Trade Desk. The Motley Fool holds positions and recommends Netflix, Trade Desk and Walmart. The Motley Fool has a disclosure policy.

techsm5

Comments



Font Size
+
16
-
lines height
+
2
-