On Monday, the Dow Jones Industrial Average plunged by over 1,000 points, triggered by the accelerating outbreak of coronavirus outside China. Also, with my focus on The Trade Desk (NASDAQ:TTD), I see the TTD stock dropping down near $280.
However, the correction does not come as a big surprise. Oxford Economics is talking about $1.1 trillion in loss income due to the coronavirus outbreak. The markets or individual stocks have hardly discounted this factor.
Specific to The Trade Desk, I am bearish in the near-term and I believe that a deeper correction would be an opportunity to accumulate. The coronavirus and its impact on growth is not the only reason. In the last two years, TTD stock has skyrocketed by 401%.
Importantly, based on analyst consensus estimates, The Trade Desk is likely to report earnings per share of $3.82 in fiscal year 2020. Considering the current stock price of $281, it is trading at a forward price-to-earnings-ratio of 75. Surely, valuations are stretched and a correction imminent.
Furthermore, the median stock price forecast by 18 analysts implies a median target of $292.5. The stock ism’t trading far below those levels and it underscores my point that there is no juice left in the rally.
Therefore, to back my bearish view, the focus has been on current valuations. But as for my optimism through a wider lens, the business growth outlook is robust for the long-term and I don’t see financial or long-term growth headwinds.
Growth Visibility Makes TTD Stock Attractive
A key reason to believe that a deep correction is an accumulation opportunity is the industry growth outlook. Programmatic advertising spending will continue to increase in the coming years.
The total amount spent on programmatic advertising has exceeded $100 billion in 2019. It is expected to increase to $127 billion in 2020 and $147 billion in 2021. The Trade Desk, in their earnings call for the third quarter of 2019, talk about an addressable market of $1 trillion in the next decade.
The Trade Desk is well-positioned to capitalize on this opportunity with their expanding Omnichannel capabilities. This includes connected TV, mobile, video, audio and social media advertising. As an example, spend on the company’s platform on CTV increased by 145% in Q3 2019 as compared to Q3 2018. Similarly, audio spending increased by 162% for the comparable period.
Another key growth trigger for the company is international expansion. The Trade Desk is already investing in selected regions in Europe and Asia.
In particular, the company is bullish on China and Indonesia. In China, the company has partnered with Blue Media, which is one of the largest Chinese media agencies. Therefore, it is seeing some success in the early stages of growth.
From a cash flow perspective, the company had 742 clients as of FY2018. The company’s client retention rate has been over 95%. I want to stress on this point because as the client base grows and retention rate remains high, there is clear cash flow visibility.
Based on Q3 2019 numbers, the company is positioned for operating cash flow of $115 million to $125 million in 2019. With global opportunities, expanding client base, high client retention and omnichannel capabilities, I expect the company to be a cash flow machine in the next five years.
My Final Views on TTD Stock
From a balance sheet perspective, The Trade Desk has zero debt and a cash balance of $307 million as of Q3 2019. This will help the company in accelerating international expansion and investing in technology, which are among the core objectives for 2020.
It is worth noting that the company has an increasing number of large advertisers in their platform (More than 70% of the AdAge top 200 advertisers). The Trade Desk is expecting growth in spend by these advertisers in 2020 and beyond. This should help in accelerating growth beyond new advertiser acquisition.
The Programmatic advertising industry is still at an early stage of growth. The Trade Desk is well positioned to benefit with its innovation driven omnichannel capabilities. However, the stock has surged by 401% in the last two years and looks expensive.
Today, a significant broad market correction is underway, triggered by fears of weak GDP growth. I expect TTD stock to decline and investors can use any sharp correction as an opportunity to accumulate the stock.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
