Shares of The Trade Desk (NASDAQ:TTD) slipped after the leader in buy-side, data-driven advertising reported first quarter numbers that, despite topping analysts’ average estimates, fell short of investors’ supercharged expectations.
TTD stock dropped about 3% after the print.
Long-term investors would be wise to ignore this weakness and stick with The Trade Desk stock over the long haul. There are five major reasons for my bullishness:
- The company’s Q1 numbers were pretty good, although they weren’t perfect. But, in the big picture, they do not come close to providing a good reason to sell TTD stock.
- Near-term coronavirus headwinds will reverse course over the next few months and give way to strong second-half growth for The Trade Desk.
- The data-driven advertising trend is going to accelerate over the next few years, thanks in part to Covid-19.
- The Trade Desk continues to expand its leadership presence in buy-side, data-driven advertising.
- The long-term potential gains of TTD stock is compelling.
Overall, TTD stock is still a long-term winner. Investors should own the shares and buy more of the stock on significant dips.
The Trade Desk’s Earnings Were Good
The Trade Desk’s first-quarter numbers were pretty good.
Its revenue jumped 33% year-over-year, led by the 100% growth of connected TV ad spending by its clients and a 74% YOY surge of mobile video ad spending by them. Its gross margins expanded nearly three percentage points YOY. Its profits, excluding certain items, rose more than 50% YOY.
Those are good numbers. The shares dropped because the firm’s management reported that its growth trends were off to a rocky start in April and because TTD stock had rallied tremendously heading into the results.
But those aren’t good reasons to sell the shares. Weak April growth trends will reverse course, and the stock is still undervalued relative to the company’s long-term growth potential.
Coronavirus Headwinds Will Flip
The “red flag” from The Trade Desk’s first-quarter earnings report was that its customers’ April ad spending trends are off to a rocky start.
Don’t pay too much attention to that. Of course, programmatic ad spending — which can be turned on and off at any point — dropped dramatically amid the global economic shut down. That’s not too important.
Instead, what is important is that The Trade Desk saw ad spending trends on its platform improve in the last ten days of April. What’s also important is that the economy is gradually starting to re-open, and that businesses are now adjusting their ad spending, instead of refraining from advertising at all as they had been doing at the beginning of the crisis.
In other words, all signs point to the idea that the worst of the coronavirus’ impact on The Trade Desk is over. Going forward, the economy will normalize, businesses will increase their ad budgets, and The Trade Desk’s growth trends will improve.
The Data-Driven Advertising Trend Will Accelerate
Covid-19 has created a near-term headwind for The Trade Desk. But it’s also laid the groundwork for a long-term tailwind in the entire data-driven advertising space.
The logic is pretty simple. Amid the coronavirus pandemic, ad budgets are tight, and companies can’t just throw a lot of money at advertising. They need to smartly spend money on advertising. And the smartest way to spend on advertising is by utilizing data-driven advertising, which enables marketers to measure the effectiveness of each ad dollar they spend.
Consequently, over the next few months, there will likely be a rush of new clients into the data-driven advertising space. Those clients will like the benefits that data-driven advertising offers. They will become long-term customers of The Trade Desk. And, within the next few years, data-driven advertising will be widespread across the whole advertising universe.
The Trade Desk Is a Leader
In the buy-side, data-driven advertising space, The Trade Desk is the leader. Thanks to its innovation and partnerships, its leadership position is only widening.
One example of that is the company’s recent partnership with TikTok, which will allow advertisers to directly access premium TikTok ad inventory across the Asia-Pacific region via The Trade Desk’s platform. Partnerships like that further widen the reach of The Trade Desk’s ad platform, bolstering its appeal to multi-channel advertisers (and everyone is in that category these days).
And The Trade Desk’s Unified ID technology essentially enables customer to leverage the company’s robust cookie footprint to create a scalable, universal digital customer ID. Technological advancements like those further enhance the capabilities of the firm’s ad platform, thereby increasing its value to more and more customers.
The Stock Can Climb Tremendously
It doesn’t take a rocket scientist to connect the dots.
Data-driven advertising is the future of advertising. The Trade Desk is the unparalleled leader of data-driven advertising, so The Trade Desk is the future of advertising.
In other words, as data-driven advertising becomes widespread, The Trade Desk’s ad platform will become widely used by advertisers.
That means the firm has huge growth potential. Gross ad spending through the platform came in at just over $3.1 billion in 2019. Total global ad spending last year was about $650 billion.
Because of its massive tailwinds and huge addressable market, The Trade Desk will sustain 20%-plus annual revenue growth for the foreseeable future. Such huge revenue growth should be driven in part by higher average spending by its clients, boosting the company’s profit margins. Thus, The Trade Desk’s profits will likely rise by 25%-plus per year over the next few years.
As a result, I estimate that The Trade Desk’s 2025 earnings per share potential at $12. Based a price-earning multiple of 35, which is average for the application software sector, that implies a 2024 price target for the shares of $420.
The Bottom Line on TTD Stock
The Trade Desk is a long-term winner. Don’t let its minor selloff after the company’s Q1 results convince you otherwise. The shares are just taking a breather after their huge rally off their March lows. Soon this breather will end. When it does, this stock will get back to its winning ways.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he owned shares of The Trade Desk.