The stock of The Trade Desk (NAS:TTD, 30-year Financials) appears to be 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 $70.62 per share and the market cap of $33.6 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 31.12% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. The Trade Desk has a cash-to-debt ratio of 2.40, which which ranks in the middle range of the companies in Software industry. The overall financial strength of The Trade Desk is 7 out of 10, which indicates that the financial strength of The Trade Desk is fair. This is the debt and cash of The Trade Desk over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one 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 $895.2 million and earnings of $0.486 a share. Its operating margin is 15.78%, which ranks better than 82% of the companies in Software industry. Overall, GuruFocus ranks the profitability of The Trade Desk at 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 one of the most important factors 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. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. The Trade Desk’s 3-year average revenue growth rate is better than 90% of the companies in Software industry. The Trade Desk’s 3-year average EBITDA growth rate is 26.6%, which ranks better than 72% of the companies in Software industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, The Trade Desk’s return on invested capital is 37.56, and its cost of capital is 16.13. The historical ROIC vs WACC comparison of The Trade Desk is shown below:
In conclusion, The stock of The Trade Desk (NAS:TTD, 30-year Financials) shows every sign of being 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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