The Trade Desk Stock: Navigating Upward Trajectory At 48x EBITDA (NASDAQ:TTD)

Investment Thesis

The Trade Desk (NASDAQ:TTD) delivers a mixed report, where its guidance does point to accelerating sequential quarterly growth rates, but for all intents and purposes it appears that for now, The Trade Desk’s growth rates will be stuck at mid-25% CAGR.

Given where expectations are, I believe that paying more than 45x this year’s EBITDA for The Trade Desk doesn’t leave new investors with much upside potential. Amongst advertisers, I see several more compelling investment opportunities.

Rapid Recap

Earlier this week, as we headed into Q2 earnings, I reasoned,

I make the case that The Trade Desk’s multiple has already increased by 100% since the start of 2023. Therefore, I believe that its stock is already fully priced. And so, I’ll stick to the sidelines.

[…] since the start of 2023, The Trade Desk’s multiple has doubled. Yes, The Trade Desk is more likely than not to see every quarter of 2023 reporting sequential accelerating growth rates.

But for investors getting involved right now, to pay about 22x forward sales, what sort of further upside can investors hope to see from here? I’m not convinced there’s much more upside left, that hasn’t already been priced in.

With hindsight, I see that Trade Desk’s Q2 2023 results justify my reasoning.

Revenue Growth Rates Stabilize

During earnings season we’ve seen a few ad companies report dramatically improving sequential accelerations from Q1 into Q2. For instance, Meta (META) and Alphabet (GOOG)(GOOGL) jump to mind. While others, for example, AppLovin (APP) had enough inflection starting to show in their previous quarter’s results, but it’s the outlook for Q3 that has truly inspired investors that better times are ahead for AppLovin.

With this context in mind, consider what The Trade Desk points to. The Trade Desk’s guidance points to 23% y/y growth rates for Q3, which we can then add a further 2% on top knowing that they’ll be guiding conservatively in an effort to impress investors.

Indeed, as you can see above, with the exception of Q1 2023, where The Trade Desk beat consensus revenue estimates by 5%, for the most part, The Trade Desk beats expectations by approximately 2%.

What’s more, as I noted earlier this week, The Trade Desk’s comparables with H2 2023 become significantly easier, which should have allowed The Trade Desk to bedazzle investors with its alluring Q3 guidance. And yet, 25% CAGR seems to be where The Trade Desk is settling.

TTD Valuation — Never Cheap

The crown jewel of The Trade Desk’s investment thesis is that the business oozes profitability. This is, if we pretend that management works for free and stock-based compensation isn’t an actual cost, that ends up diluting shareholders.

With that consideration, note what I stated back in another TTD analysis over the summer,

Let’s assume that The Trade Desk makes about $270 million of EBITDA in H1 2023. And then, let’s assume, given that Q4 is typically the seasonal high for The Trade Desk, that 2023, The Trade Desk makes about $750 million of EBITDA in 2023.

We now know that H1 2023 saw The Trade Desk deliver $288 million EBITDA, slightly higher than my prior estimate. And we also see that The Trade Desk guides for at least $185 million for Q3, so, let’s assume that the final figure will come in at $205 million.

Altogether, I suspect this will mean that The Trade Desk will report around $830 million of EBITDA in 2023. Slightly higher than I had previously estimated.

This leaves The Trade Desk now priced at approximately 48x this year’s EBITDA. Clearly, this is a premium valuation for a stock that is largely expected to grow at around 25% CAGR.

Further Considerations

As you know, The Trade Desk has never traded particularly cheaply. And perhaps most insightful of all, which I’ve not given much room for discussion until now, The Trade Desk is evidently taking substantial market share from its peers.

After all, there’s absolutely no doubt that the ad sector is in turmoil and has been for around 2 years. The reasoning is that if the Trade Desk is able to deliver approximately 25% in a weak market, investors’ expectations are that TTD should sizzle higher once the advertising market regains its footing.

Next, The Trade Desk’s prepared remarks put a focus on retail advertising as a new vertical of growth opportunity. The Trade Desk’s key value proposition is that they are an independent platform.

As such, The Trade Desk is eager to serve advertisers and agencies, but not compete with them. Needless to say, that’s not the case with other advertising platforms, for example with advertising on Amazon (AMZN) or other outlets.

Another worthy insight from The Trade Desk’s remarks is its continuous push to broaden its UID 2.0 platform into an open platform. There are other unique identifiers being developed, as not all adtech companies wish to embrace The Trade Desk’s technology.

Nonetheless, the fact of the matter is that The Trade Desk appears very well positioned to continue to operate in the post-cookie environment starting in early 2024.

In sum, The Trade Desk has an attractive story and a very rich valuation.

The Bottom Line

From my analysis, it becomes apparent that The Trade Desk presents a somewhat mixed picture. While its guidance indicates a trajectory of accelerating sequential quarterly growth rates, it’s evident that the company’s growth rates might remain constrained at a mid-25% CAGR.

As an investor, I find it challenging to justify paying over 45x this year’s EBITDA for TTD, considering the limited upside potential.

While TTD is expected to witness growth throughout 2023, the stock’s multiple has already doubled since the start of the year. This suggests that the current stock price already accounts for much of the anticipated growth.

Notably, TTD stands out for its profitability, albeit with certain considerations. TTD’s market share gain in a tumultuous advertising sector demonstrates its potential.

The company’s emphasis on retail advertising, independent platform status, and the expansion of UID 2.0 reflect strategic moves for growth in the post-cookie era.

In conclusion, while TTD holds promise, its valuation appears rich, and I perceive other investment opportunities among advertisers as more compelling.