The rally in red-hot Trade Desk (NASDAQ:TTD) just won’t stop, at every turn Trade Desk stock seems to get more good news.
The company, which provides programmatic advertising solutions for advertisers of all shapes and sizes, has found itself at the center of multiple tailwinds recently. Namely, programmatic advertising is the future, and as advertisers pour massive amounts of money into multiple different advertising channels, they are increasingly using data and algorithms to optimize spend.
That is why Trade Desk has been on fire in 2018. The big rally continued on Friday, Aug. 10, when Trade Desk shot up more than 30% in response to yet another double-beat-and-raise quarter.
In total, Trade Desk stock is now up more than 175% year-to-date. That is a huge run, and it isn’t over just yet.
Thanks to secular growth tailwinds in the global programmatic advertising market and Trade Desk’s relatively small size, I think Trade Desk stock is fairly valued right around $130. As such, while the days of nearly 200% gains in eight months are over, Trade Desk still has nice multi-year upside from today’s levels.
Here’s a deeper look.
Trade Desk Reports Blowout Numbers
Trade Desk’s second quarter earnings report was nothing short of spectacular. In short, it was a double-beat-and-raise quarter that showed strength across all key operating metrics.
Revenues were up 54% year-over-year. That is the same growth rate as the year ago quarter. The fact that this company has sustained 50%-plus revenue growth over the past 12 months (and that revenue growth isn’t even slowing) is a testament to the strength of the company’s operational tailwinds.
Better yet, the robust top-line growth is diversified across multiple advertising channels. Mobile was the big growth driver, up 89% in the quarter and comprising 45% of gross ad spend (the highest mark ever). Within mobile, mobile video was particularly strong, up 156%. Even beyond mobile, growth was big. Connected TV was up more than 100%. Audio was up nearly 200%.
Clearly, the programmatic advertising trend isn’t just hitting the mobile world. It is affecting every advertising channel, and as a result, Trade Desk is growing at a robust rate across the entire advertising spectrum.
Meanwhile, customer retention remains higher (above 95% for 18 straight quarters). New products are launching soon which will hopefully keep that retention rate high and up spend per customer. And, although margins are down, they are only temporarily depressed due to investments, which are clearly paying off in the form of sustained 50%-plus revenue growth.
Overall, the quarter was great. Revenue growth remains big. Programmatic advertising tailwinds are spreading across all facets of the advertising world. Retention remains high. The product road-map remains promising. And, margins are healthy, even during this big growth era.
Long-Term Growth Narrative Is Healthy
The long-term bull thesis on Trade Desk stock looks really good.
Programmatic advertising is the future. Over the next several years, advertisers will increasingly use data and algorithms to manage, analyze, and optimize ad spend across all ad channels, from web to mobile to TV to audio. As this transition plays out, Trade Desk will become a bigger and bigger part of the global advertising model.
The global advertising market is $700 billion in size, and moving towards $1 trillion over the next decade. Trade Desk’s gross ad spend in 2017 was well under $2 billion. From this perspective, this is a company with small share in a rapidly growing market.
That is a recipe for long-term success. As such, Trade Desk can grow gross ad spend to $10, $20, or even $30 billion over the next decade, and still only control a fraction of the advertising market. That means that even conservative assumptions regarding market share imply huge go-forward growth prospects.
Fundamentals Support $130 Price Tag
Looking out over the next decade, I think the fundamentals support a $130 price tag today.
Revenues have been growing at a 50%-plus clip. Growth will moderate over the next several years as programmatic advertising growth slows due to U.S. market saturation. But, there is a whole additional lever for growth in international markets. Consequently, this is easily a 20% revenue growth company over the next decade.
Margins should slightly improve during that stretch as investment eases and the company leverages operating expenses.
Assuming ~20% revenue growth and slight margin expansion, I think Trade Desk can do about $11 in earnings per share in five years. This is a capex-light business in a big growth market that generates tons of free cash flow and has a solid balance sheet. Consequently, a big-growth 25X forward multiple makes sense in a decade.
A 25X forward multiple on $11 implies nine-year forward price target for Trade Desk stock of $275. Discounted back by 10% per year, that equates to a year-end price target of roughly $130.
Bottom Line on Trade Desk Stock
Trade Desk has been red-hot in 2018. The most recent earnings pop finally shot Trade Desk stock into fair value territory, implying that the era of 20%-plus gains per month is over.
But, Trade Desk stock has a healthy long-term growth narrative which supports a long-term price target north of $250. As such, this is one of those big-growth stocks investors should buy and hold for the long haul.
As of this writing, Luke Lango was long TTD.