Slaven Vlasic
Elevator Pitch
My investment rating for The Trade Desk’s (NASDAQ:TTD) shares is a Buy. TTD calls itself an operator of “a global technology platform” which helps “buyers of advertising” to “create, manage, and optimize digital advertising campaigns” in its press releases.
I rate TTD as a Buy, as I am of the view that its shares should continue to head up. The Trade Desk’s key second-quarter metrics were impressive, and this gave the company the confidence to guide for above-expectation revenue and EBITDA for the third quarter. Another good set of results for Q3 2022 will be a short-term catalyst for The Trade Desk, while TTD has no lack of long-term drivers such as Connected TV or CTV share gains, the new shopper marketing revenue stream, and international expansion.
What Were The Trade Desk’s Expected Earnings?
The sell-side analysts had expected The Trade Desk to generate non-GAAP adjusted earnings per share, or EPS, of $0.20 for the second quarter of this year. This implies a +11% YoY growth in TTD’s bottom line versus its Q2 2021 normalized EPS of $0.18.
I touch on The Trade Desk’s actual second-quarter financial performance in the subsequent two sections of the article.
Did The Trade Desk Beat Earnings?
The Trade Desk didn’t beat earnings expectations for Q2 2022, but the company also didn’t deliver a bottom line miss. TTD achieved a non-GAAP EPS of $0.20 for Q2 2022, which was exactly what Wall Street had anticipated prior to the actual results announcement on August 9, 2022 after trading hours.
Notwithstanding the fact that the company’s recent earnings were just in-line, investors reacted favorably to TTD’s Q2 2022 financial results release. The Trade Desk’s stock price surged by +36% from $54.50 as of August 9, 2022 to $74.24 as of August 10, 2022. TTD’s last done share price was $75.41 as of August 15, 2022, implying that the stock had gone up by +38% in the week following its earnings announcement.
In the next section, I discuss whether there were any specific metrics associated with TTD’s Q2 2022 results, apart from in-line EPS, that impressed analysts and investors.
TTD Stock Key Metrics
TTD’s key metrics for the second quarter of 2022 were good, and this could be a key factor which drove The Trade Desk’s post-results announcement share price jump.
Based on the company’s Q2 2022 financial results media release, The Trade Desk’s top line increased by +35% YoY to $377 million in the recent quarter. More importantly, TTD’s actual second-quarter revenue was +3% and +4% better than the sell-side’s consensus projection and the management’s guidance, respectively according to S&P Capital IQ data.
Non-GAAP adjusted EBITDA for TTD grew by +18% YoY to $139 million in Q2 2022, and this was ahead of expectations. As per S&P Capital IQ, Wall Street analysts had estimated a lower YoY EBITDA growth of +13% for The Trade Desk in the second quarter, while company management had earlier guided for a more modest +15% YoY EBITDA increase for Q2.
A key operating metric that investors should take note of is customer retention rate. In its second-quarter results press release, The Trade Desk disclosed that its customer retention rate exceeded the 95% level, and noted that this was the eighth straight quarter running that TTD had achieved this feat.
The growth in Connected TV Advertising or CTV was the main driver of The Trade Desk’s excellent financial metrics in the recent quarter. At its Q2 2022 investor briefing, The Trade Desk revealed that “CTV by a wide margin led our growth again” in the second quarter, and it also disclosed that the “video (channel), which includes CTV, represented a low 40s percentage share of our business.”
What To Expect After Earnings
The Trade Desk’s better-than-expected Q3 2022 management guidance set the tone for the market’s positive expectations of TTD’s post-Q2 2022 financial performance. This was also a critical reason for the company’s good post-earnings stock price surge.
TTD guided for Q3 2022 top line and EBITDA of $385 million and $140 million, respectively as part of its Q2 2022 earnings release. It is important to note that The Trade Desk’s third-quarter management guidance exceeded expectations. According to S&P Capital IQ, the market’s consensus numbers before the Q2 results point to TTD delivering revenue of $382 million and EBITDA of $134 million for the upcoming third quarter. Furthermore, the $140 million Q3 2022 guidance implies that The Trade Desk’s EBITDA growth is expected to accelerate from +18% YoY in Q2 2022 to +19% YoY in Q3 2022.
In the subsequent section, I detail The Trade Desk’s merits as a potential long-term investment.
Is TTD A Good Investment Long Term?
TTD is a good investment for the long run in my opinion, taking into account three key growth drivers.
Firstly, CTV is expected to grab a larger slice of the advertising market going forward to the benefit of TTD.
The Trade Desk emphasized at its second-quarter results call that the company “gained more market share or grabbed more land than at any period in our history” in 1H 2022, which it attributed to “marketers” increasingly focused on “advertising that delivers the highest return and CTV has moved up the priority list.” The company’s comments are supported by third-party research as well. PricewaterhouseCoopers or PWC forecasts that the global connected TV advertising market will grow by a +28% CAGR from $3.1 billion in 2017 to $27.7 billion in 2026.
Secondly, there is huge potential associated with The Trade Desk building a meaningful presence in the shopper marketing space.
Walmart Inc. (WMT) disclosed in August last year that it introduced “Walmart DSP”, “a first-of-its kind demand-side platform” to the market “that was built in partnership with” TTD, and this marked a significant milestone for TTD. At its earnings call for the fourth quarter of 2021 period held on February 16, 2022, The Trade Desk stressed that “the shopper marketing TAM (Total Addressable Market) is at least $100 billion.” This is an indication of the potential incremental revenue (a fraction of that $100 billion TAM) that TTD can add with contributions from shopper marketing going forward.
Thirdly, The Trade Desk has room to grow its international revenue base.
TTD had 14% of its gross billings coming from markets outside the US in fiscal 2021, as per its most recent 10-K filing. In contrast, The Trade Desk shared at the company’s Q4 2021 investor briefing earlier that it thinks its long-term TAM is around $1 trillion, of which foreign markets should account for 60% of the estimated TAM. In other words, there is a big difference in terms of the geographic mix for its historical gross billings and its future growth opportunities as indicated by its TAM. This suggests that TTD has yet to scratch the surface when it comes to realizing the potential of foreign market expansion.
Is TTD Stock A Buy, Sell, or Hold?
I rate TTD as a Buy. The company’s short-term growth prospects should be healthy, judging by its Q2 2022 metrics and Q3 2022 guidance. In the longer-term, The Trade Desk’s outlook is equally bright, taking into account the multiple growth drivers discussed in the preceding section.
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