The Trade Desk (NASDAQ:TTD) stock went public in September 2016 at $18. In just under 39 months, The Trade Desk stock now has gained nearly 1,500% from its initial public offering price.
That performance obviously is spectacular. But it’s even more spectacular in the context of The Trade Desk’s industry. After all, adtech plays have been perhaps the worst investments of the decade. Rocket Fuel closed its first day of trading in 2013 at $55. It sold itself to Sizmek for $2.60 in 2017; the combined company went bankrupt earlier this year.
Marin Software (NASDAQ:MRIN) is down over 98% from its 2012 first-day close and has a market capitalization below $10 million. YuMe went public above $9 per share and sold for less than $2. the Rubicon Project (NYSE:RUBI) and Telaria (NYSE:TLRA), formerly known as Tremor Video, have gained sharply in recent years yet still trade below their respective IPO prices.
The Trade Desk has won while nearly every other independent adtech play has lost. Even though the returns already have been huge, and valuation is a question mark, I’d expect the company to keep winning — and TTD stock to keep gaining.
The Operating Edge for TTD
There are two reasons — one internal, one external — that help why The Trade Desk has succeeded where others have failed. The company’s operating model certainly has been a big help. The Trade Desk offers a true demand-side (or buy-side) platform, allowing its customers to run branding campaigns across multiple channels.
The Trade Desk first offered that product to advertising agencies, though it’s now moved on to larger brands as well that have their own in-house capabilities. But by focusing solely on one side of the transaction, The Trade Desk gained credibility and trust from its clients.
Obviously, execution has been on point; there is no shortage of other DSPs out there, none of whom have posted the growth that TTD has. But the model itself has been useful in allowing agencies and brands to navigate digital advertising, and increasingly channels like connected TV, streaming music, and even podcasts.
That model, and TTD’s reputation as a gatekeeper of client interests, has proven particularly valuable in the current online advertising climate. The “walled garden” approach of online ad leaders Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) is starting to show some cracks.
Those two companies primarily keep third-party providers out (though TTD does have the ability to run Google campaigns, for instance) — and that strategy largely choked off independent adtech players in recent years. In 2016, for instance, an estimated 99% of industry growth accrued just to its two leaders.
But buyers increasingly are looking for more than just those two platforms — and increasingly worried about the inherent conflicts of the two online ad giants. On both fronts, The Trade Desk looks particularly well positioned.
The Fundamental Case for TTD Stock
As a result, The Trade Desk has posted torrid growth. Revenue increased 78% in 2016, 52% in 2017, and 55% last year. Top-line growth is guided to at least 38% in 2019.
There’s plenty of room for that growth to continue. TTD is having success in connected TV, where streaming growth should drive more demand. Streaming audio and podcasts further expand the market. In digital advertising, so-called “programmatic” demand, where TTD is strongest, continues to grow. And Facebook and Google are losing market share.
Amazon.com (NASDAQ:AMZN) is a reason for those share losses, and on the third-quarter conference call, Trade Desk CEO Jeff Green detailed an agreement between the two companies. As more and more buyers and sellers look outside the walled gardens of Facebook and Google, The Trade Desk will have an increasingly large opportunity. New channels and new international markets only add to that opportunity.
In the meantime, this is a company that already has impressive EBITDA (earnings before interest, taxes, depreciation and amortization) margins. It’s easily profitable. Growth remains sizzling, and the opportunity is large. This simply is one of the better growth stories in the market right now.
The Risks to TTD Stock
That said, there are risks here, particularly with TTD stock bouncing back to $250 since the third-quarter report. Valuation, unsurprisingly, is one of those risks. Shares trade at 65x the consensus 2020 earnings per share estimate.
In the context of this market, that multiple doesn’t sound that high. After all, multiples over 100x are not uncommon. But, again, The Trade Desk already has relatively high margins: on an adjusted basis, net profit this year should be over 20% of revenue.
That figure can expand as the company grows — but not at the same rate of other growth companies whose net margins often are in the single-digits (or in some cases, still negative). Put another way, The Trade Desk at this point isn’t going to have the same operating leverage going forward as big growth names like Roku (NASDAQ:ROKU) or Shopify (NYSE:SHOP). That puts a lot of pressure on revenue growth to drive bottom-line increases.
And competition can impact that top-line growth. Google and Facebook may respond and try to capture more spending outside their platforms. Smaller private competitors are going to try and take share. More broadly, independent adtech has been a difficult industry in the past. It may be so again at some point in the future — perhaps if and when the U.S. economy finally shows some signs of weakness, and ad spending as a whole starts to pull back.
The last risk is valuation from a broader sense. It’s been clear, particularly in recent years, that investors should focus on the positive aspects of a growth story rather than concerns about its valuation. As long as that holds, TTD stock will be fine. But as seen in trading ahead of the Q3 release, valuation worries can arise in a hurry.
Still, those look like risks worth taking. I don’t expect TTD stock to gain another 1,500% in the next three years — but there’s still a nice case for upside. The Trade Desk is winning in a growing market. That’s been good enough so far, and it should be good enough going forward.
As of this writing, Vince Martin has no positions in any securities mentioned.