The Trade Desk Stock Valuations Are a Still a Worrying Concern

Ever since The Trade Desk (NASDAQ:TTD) stock peaked at nearly $1,000 in December, bargain hunters are trying to decide if the stock is a buy from here. Adding to the uncertainties are mixed first-quarter results.

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TTD stock traded in a narrow range since beating Q1 estimates but issuing downbeat guidance. This is what investors should do next.

TTD Stock Clouded By Outlook

In the first-quarter report, TTD posted non-GAAP earnings per share of $1.41. It posted impressive revenue growth of 36.8% from the previous year to $219.8 million.

For the second quarter, TTD forecast revenue of $259 million to $262 million, within the consensus estimate of $251.6 million. It sees an adjusted EBITDA of at least $84 million.

For a company valued at around $25 billion, the annualized $1 billion revenue, or 25x sales, leaves it no room to issue a clouded outlook. On its press release, the company wrote, “We have not provided an outlook for GAAP net income or reconciliation of adjusted EBITDA guidance to net income.” It cited the variability and complexity of charges (excluded from non-GAAP) as the issue. For example, stock-based compensation varies with its share price.

The stock compensation excuse is unusual. Many technology firms will issue generous stock-based compensation but will still issue a clear outlook. This is troubling for shareholders because TTD may pay out more than expected in the next quarter, sending GAAP earnings to a loss.

The stock split of 10-for-1 will improve liquidity and attract minor retail investors. Still, the split does not change the lofty valuations.

Opportunity

CEO Jeff Green is highly bullish on TTD’s Connected TV business. He cited CTV more than doubled spend from last year. The impressive trends in CTV will accelerate. Traditional television is slowing while CTV growth is taking off.

Covid-19 provided a macro tailwind for the CTV market. Cord-cutting in linear cable also accelerated. People are looking more often for Internet-based content, which CTV offers. Advertise realize the shift and are increasing their spending on this segment. In addition to TTD offering different apps and channels, the company helps advertisers manage their reach and frequency. So, this fosters the growth in CTV and raises The Trade Desk’s long-term prospects.

TTD Peer Score Card
Click to Enlarge
Source: Stock Rover

Compared to its peers, TTD shares rank the third highest on value. The growth score is a perfect 100/100.

TTD’s value is unlikely to improve in the near term. The market is willing to pay a premium for the company’s strong growth prospects in 2021. If the value score rises, that is bad news for the stock. It would imply the share price dropping sharply.

On its conference call, CFO Blake Grayson said, “With all of that seeing reasonable acceleration this year on a full-year basis gets me really excited, comfortable about the business and where things are in 2021.”

Despite the CFO’s optimism, cautious investors should align the required future growth against the current stock price.

Price Target

A five-year discounted cash flow growth exit model uses the Perpetuity Growth formula (also known as Gordon Growth) to calculate Terminal Value after five years. Assume the following metrics:

Metrics Range Conclusion
Discount rate 9.8% – 8.8% 9.3%
Perpetuity growth rate 2.8% – 3.8% 3.3%
Fair value $450 – $631 $525.78
Models courtesy of Finbox

Notice the lofty annual implied revenue growth below:

(USD in millions) Input Projections
Fiscal Years Ending 20-Dec 21-Dec 22-Dec 23-Dec 24-Dec 25-Dec
Revenue 836 1,136 1,481 2,147 3,113 4,514
% Growth 26.5% 35.9% 30.3% 45% 45% 45%
EBITDA 167 404 666 1,181 2,024 2,483
% of Revenue 20% 35.6% 45% 55% 65% 55%

Before the 10-for-1 stock split, TTD shares have a fair value of around $516. Readers may lower the discount rate if the risk assumptions are too high. Also, setting a higher growth rate for this year and next would increase the implied fair value.

Your Takeaway

The Trade Desk is down sharply from all-time highs for a good reason. After the Nasdaq stumbled badly in February, investors are unwilling to overpay for growth stocks. TTD shares had a strong run but need to consolidate from here.

Expect the stock to trade in a tight range for a few months. The stock may resume its uptrend after posting better quarterly results this year and in 2022.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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