The stock market has decimated tech stocks, and many fast-growing companies are down significantly from their all-time highs. But this can provide appealing opportunities for long-term investors who are willing to sift through the rocks to find some diamonds in the rough.
The Trade Desk (NASDAQ: TTD) and Adyen (OTC: ADYE.Y) are down more than 50% off their all-time highs, creating an optimal time to pick up some shares. More importantly, both companies continue to leverage their competitive advantages to thrive in their respective industries. This should continue over the long term, and investors might want to add these two companies to their portfolios.
1. The Trade Desk
The Trade Desk stands at the top among independent advertising technology (adtech) companies that operate outside the walled gardens of Alphabet‘s Google and Meta Platforms‘ Facebook. It is the largest independent platform where advertisers can buy ad space.
The Trade Desk thrives on its scale and dominance on the independent side of adtech. While Alphabet and Meta might be larger, both have incentives to bring advertisers to their own platforms, leaving The Trade Desk as the best choice for advertisers wanting a neutral middleman. In the first quarter of 2022, revenue grew 43% year over year to $315 million, and there was more than $136 million in free cash flow. It can reinvest this cash into strengthening its partnerships with ad inventory providers in the future, which solidifies its position as the leader in the industry.
Even after facilitating nearly $6.2 billion in ad spending in 2021, the company has tons of potential left. According to PubMatic, a Trade Desk partner on the sell side of adtech, global digital ad spend is expected to reach $627 billion by 2024, so the opportunity for The Trade Desk is still significant.
One of the main risks to advertising-focused companies is an economic downturn, because one of the easier places for businesses to cut budgets is advertising. Social media company Snap has already reduced its second-quarter guidance because of macroeconomic conditions, but The Trade Desk seems to be unphased. The company reiterated its guidance for the second quarter, signaling that it isn’t expecting to see as much of a slowdown as Snap.
The Trade Desk is not cheap trading at over 67 times free cash flow, but that’s close to its lowest multiple since 2018. Because of this high price, it might be wise to dollar-cost average into a position at lower valuations over time. But investors should not miss out on this opportunity because of the high valuation — it can be a major winner over the long term if it can continue taking market share in the advertising space.
You might not know this Netherlands-based payment processor, but Adyen is likely familiar with you. If you ever paid for an Uber ride or a burger at McDonald’s with a digital form of payment, then you have experience with Adyen without even knowing it. The company has an end-to-end payments platform, offering everything from processing to digital card issuance.
What makes Adyen unique is its approach to growth. Instead of increasing its take rate on the volume it processes, Adyen’s take rate actually decreases as customers process more volume. While this might seem counterintuitive, it has been a great selling point for the company.
This low-cost advantage has allowed it to supplant larger competitors like PayPal for payment processing. In 2018, eBay replaced PayPal with Adyen as its primary payments processor. Back then, Adyen processed only 159 billion euros (or $170 billion) in total payment volume (TPV), while PayPal processed $578 billion, meaning Adyen was just 29% the size of PayPal in terms of volume. Now, Adyen is catching up. In 2021, it processed more than 516 billion euros ($551 billion), up 70% year over year and roughly 44% the size of PayPal’s total payment volume.
While its take rate decreased almost 14% year over year in 2021, its customers relied more heavily on Adyen, which enabled revenue to jump 46% to 1 billion euros. Adyen also generated 567 million euros in free cash flow last year, up 53% and enough for an outstanding 57% free-cash-flow margin. The company can leverage this cash to continue creating a better product experience and attract larger customers.
Adyen looks like a stellar business today, and it is valued as such. The company trades at 23 times free cash flow, slightly higher than rival PayPal. However, with an end-to-end solution, the free cash flow to continue innovating, and a durable low-cost advantage, I think Adyen is well positioned to capitalize on a market expected to be worth $52.4 trillion by 2026.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jamie Louko has positions in PayPal Holdings, PubMatic, Inc., and The Trade Desk. The Motley Fool has positions in and recommends Adyen N.V., Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., PayPal Holdings, PubMatic, Inc., and The Trade Desk. The Motley Fool recommends Adyen, Uber Technologies, and eBay and recommends the following options: short July 2022 $57.50 calls on eBay. The Motley Fool has a disclosure policy.