The stock of The Trade Desk (NAS:TTD, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $658.84 per share and the market cap of $31.2 billion, The Trade Desk stock shows every sign of being significantly overvalued. GF Value for The Trade Desk is shown in the chart below.
Because The Trade Desk is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 34.6% over the past three years and is estimated to grow 30.52% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. The Trade Desk has a cash-to-debt ratio of 2.13, which ranks in the middle range of the companies in Software industry. Based on this, GuruFocus ranks The Trade Desk's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of The Trade Desk over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. The Trade Desk has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $836 million and earnings of $4.91 a share. Its operating margin is 17.25%, which ranks better than 84% of the companies in Software industry. Overall, the profitability of The Trade Desk is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of The Trade Desk over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of The Trade Desk is 34.6%, which ranks better than 89% of the companies in Software industry. The 3-year average EBITDA growth rate is 26.6%, which ranks better than 72% of the companies in Software industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, The Trade Desk's ROIC was 39.70, while its WACC came in at 17.66. The historical ROIC vs WACC comparison of The Trade Desk is shown below:
In closing, The stock of The Trade Desk (NAS:TTD, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 72% of the companies in Software industry. To learn more about The Trade Desk stock, you can check out its 30-year Financials here.
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