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One Big Thing Can The Trade Desk’s Outperformance Moving Forward

Previous to The Trade Desk (NASDAQ: TTD) releasing its first-quarter results several weeks ago, investors were worried about the overall decline in the digital ad market. The poor results of advertising giant Alphabet  did not help investor sentiment.

However, The Trade Desk surprised the market with better-than-expected revenue and profits, despite the current industry headwinds. Here’s one key reason its outperformance should continue over the long term.

Image source: Getty Images.

The growth of video and connected TV

Although The Trade Desk provides a software platform to enable its users to buy ad space in all digital media forms, including mobile, audio, display, and social, management has long recognized television is the largest category of advertising spending. And beyond that, the future of television is in streaming through connected TV (CTV) and other video devices. Consequently, The Trade Desk focuses most of its investments on video and CTV growth initiatives.

Currently, the streaming market is rapidly expanding worldwide. Grand View Research estimates the streaming market will grow at a compound annual rate of 21.3% through 2030. At the same time, traditional cable and satellite TV is in decline. And with the ongoing loss of traditional TV viewers, advertisers are gradually discovering they can no longer reach their target audience through legacy channels. Those advertisers are following viewers onto streaming platforms to reach their target audience, and that shift is one of the principal drivers behind marketers turning to The Trade Desk. And the amount of money advertisers are spending with the company is rising rapidly.

For example, the number of advertisers that spent over $1 million in CTV on The Trade Desk’s platform almost doubled from 2020 to 2021. Additionally, in the first-quarter earnings call, CEO Jeff Green said video, which includes CTV, has become the most significant part of the company’s business. And CTV is by far the fastest-growing segment.

Green also said The Trade Desk is continuing to grow faster than the ad-tech industry, meaning the company is gaining market share and should grab the lion’s share of CTV growth.

The Trade Desk is not out of the woods yet

However, there are several near-term concerns investors should consider. 

First, the war in Ukraine has already caused many advertisers to pull back ad campaigns in Europe. And who knows how long it will take for the situation in that region to stabilize.

Auto and electronics producers slowed their ad spending over 2021 due to global supply chain disruptions that have yet to be fully resolved. Various experts believe it could be another year or two before supply chains normalize — a situation that could slow the return of ad spending. And there is a real possibility a worldwide recession is on the horizon, which could temporarily cripple The Trade Desk’s core business.

With a price-to-sales ratio of 19.6, its stock trades at a high-valuation compared to other publicly traded ad-tech companies too, even after shares have declined 40% year to date.

Data by YCharts.

If the economy does dive into a recession, crimping ad spending further, the stock would likely see even greater losses.

Taking the long-term view

Even though The Trade Desk is selling at a premium valuation, it benefits the most from advertisers increasing their CTV ad budgets.

Showcasing its strong position in the industry, the company’s first-quarter revenue grew 43% year over year to $315 million, its fastest first-quarter growth rate in the last four years. Additionally, The Trade Desk’s top-line growth is dropping to the bottom line and generating substantial free cash flow (FCF).

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) increased 70% to $121 million, or about 38% of revenue. And the company reported a FCF margin of 43% in the first quarter.

With industry experts anticipating CTV ad spending to increase by the billions over the next several years, this stock could be a great fit for investors willing to hold long term.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Rob Starks Jr has positions in Alphabet (A shares) and The Trade Desk. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), and The Trade Desk. The Motley Fool has a disclosure policy.

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