The global programmatic advertising market is expected to reach $150 billion by 2023, achieving a 22% annual growth rate, according to data by Market Research Future.
The Trade Desk (TTD, Financial) is a leader in this industry, as the firm runs a software-based marketplace which connects digital ad buyers (enterprises) to content publishers (blogs and websites).
The online advertising market is dominated by two main players, Alphabet (GOOG, Financial)(GOOGL, Financial) and Meta Platforms (FB, Financial), each with a 40% market share, but The Trade Desk is growing fast and has now reached an 8% market share. Online reviews on TrustRadius are now rating The Trade Desk higher than Google Ads; thus, this small company could have a large growth runway ahead due to user preference.
This guru is buying
Paul Tudor Jones (Trades, Portfolio) is the billionaire trader and hedge fund manager who runs Tudor Investment Corporation. He was buying shares of The Trade Desk in the fourth quarter of 2021, during with the stock traded for an average price of $88 per share. Since then the stock is down 35%. Joel Greenblatt (Trades, Portfolio) was also adding to his position in the stock at similar levels in the fourth quarter.
Is this the future of advertising?
According to my analysis, The Trade Desk offers a goal-focused approach to media ad buying across display advertising on publisher websites, connected TV and even integration with the popular social media platform TikTok.
The firm uses its artificial intelligence (AI) engine to optimize the ad spend best. The user interface is simple and they offer many third party integrations. On the other hand, Google Ads has a fairly clunky and complex user interface which does take some time to learn.
In the first quarter of this year, the firm announced a partnership with Walmart (WMT, Financial) to launch a new Demand-Side Platform (DSP) that provides advertisers with access to unique Walmart shopper data. This allows a granular approach to data-driven advertising, which is ground-breaking.
Strong financials
The Trade Desk's financials appear to be in good shape. Gross advertising spend on the platform reached $6.2 billion for the trailing 12 months, a 47% increase year-over-year. The firm operates with a high adjusted Ebitda margin of 42%, up from 34% in the prior year, to give a $500 million in adjusted Ebitda.
Is the stock undervalued?
In order to value The Trade Desk, I have plugged the latest quarter's financials into my valuation model, which uses the discounted cash flow method of valuation.
I completed a very optimistic valuation predicting 30% revenue growth for the next five years, which is at the top end of analysts' estimates. In addition, I am predicting margins to increase by 6% in the next three years.
Plugging in these numbers, I get a fair value estimate of $36 per share. The stock is currently trading at $56 per share, and thus is 61% overvalued even with highly optimistic projections.
However, the company is undervalued relative to historic mutliples, and the GF Value line rates it as modestly undervalued:
Conclusion
The Trade Desk is a leading player in the programmatic advertising industry. The firm offers a solution which, according to reviews, is easier to use and more advanced than its rivals. The company has grown revenues very fast over the past few years with a three-year revenue per share growth rate of 32.1% and has very little debt, which is great to see.
However, the valuation is very high (61% overvalued based on my extremely optimistic DCF model) and the enterprise-value-to-Ebitda ratio is 43. The only consolation is that both the enterprise-value-to-Ebitda ratio and the price-sales ratio are cheap compared to the company's own historical numbers.
Overall, I like the company, its partnerships and product offering, but the valuation is much too spicy, especially given the current situation where even some of the big tech names like Meta and Alphabet seem more reasonably priced.
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