We’ve seen far too many quality stocks get cut down in the recent market panic. Online advertising marketplace The Trade Desk (NASDAQ:TTD) stock is one of the better names with one of the bigger declines.
Indeed, TTD stock lost more than half of its value in a month. That’s despite the company delivering a fourth-quarter earnings report on Feb. 27, which only supported the long-term bull case.
As with the market as a whole, there’s going to be a short-term hit from the response to the coronavirus pandemic. But, as I have advised throughout these five weeks of volatility, investors need to stay calm, stay focused and take the long view.
We’re starting to see that long-term focus return, and TTD stock has been a beneficiary. As I write this, Trade Desk has bounced some 46% from its lows. That rally should continue as it has plenty of runway left.
Buy the Leaders
With the S&P 500 still down 28% from its Feb. 19 close, there is no shortage of stocks that are much cheaper than they were six weeks ago. Looking at trailing earnings, some of those stocks look ridiculously priced.
But most of those names are cheap for good reason. Energy stocks have plunged — but so have future profits owing to the crash in crude oil prices. Retailers already were facing long-term secular headwinds from the rise of Amazon (NASDAQ:AMZN) and other e-commerce companies. The current crisis only adds to their problems.
In this kind of environment, investors would do well to focus only on the highest-quality names.
That’s of course true in any environment. But it’s perhaps more difficult to keep that focus when so many stocks look ridiculously cheap using headline numbers.
Those numbers can mislead, however. Value plays often are value traps (as has been the case in sectors like energy and retail for years now). There’s nothing wrong with paying up for quality.
And it’s a lot easier to pay for quality when the price is so much cheaper.
The Case for TTD Stock
The Trade Desk is one of those high-quality names with a cheaper price. Its online advertising marketplace is the unquestioned leader in its industry.
A key competitive advantage is that The Trade Desk focuses only on the “buy side” of online advertising demand. And so it avoids the potential conflicts of “two-sided” marketplaces, who work with — and for — both buyers and sellers of online ads.
Obviously, the demand for online advertising only will grow going forward. And the shift toward so-called “programmatic” advertising — basically automated purchases driven by algorithms, instead of buys made individually by human curators — will move an increasing share of that demand to platforms like The Trade Desk.
I often tell my readers and subscribers to focus on “megatrends” that will change the world — and to invest in the companies that can best profit from those megatrends.
5G wireless and artificial intelligence will change everyday life and boost any number of stocks with exposure to those trends.
Online advertising, and particularly programmatic advertising, is another megatrend. The Trade Desk is going to be one of the biggest beneficiaries. That alone suggests TTD stock is a solid long-term buy.
An Attractive Valuation
Even with the recent bounce, TTD stock is not all that expensive.
Shares do trade at over 50x 2019 adjusted earnings per share. But this is a company that posted revenue growth of 39% in 2019, and as of the Q4 report expected another 30%-plus increase in 2020. The market opportunity is enormous.
The Trade Desk easily can grow into that still-high valuation. With EBITDA (earnings before interest, taxes, depreciation and amortization) margins above 30%, higher revenue will drive sharply higher profits as well.
There will be short-term challenges in the online advertising market. The likes of Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), Twitter (NYSE:TWTR), and Facebook (NASDAQ:FB) will see their ad revenue take a hit. Facebook executives already have said so publicly.
But, again, this is not a stock that’s owned for the short term. It should be owned for the long haul. Digital advertising will bounce back quickly once this crisis passes— and then resume its explosive growth. I believe the same will be true for the world economy as a whole.
Investors need to keep their eye on that more optimistic future, as difficult as it is during a turbulent time. Those that can’t keep that focus have sold TTD stock. Those that can should take advantage.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.