Should You Buy the Dip in The Trade Desk?

The Trade Desk (TTD) had a good run over the past year recovering from the lows of the pandemic and hitting fresh all-time highs before its stocks plunged at the end of December. While growing competition in the technology sector is a concern for the company, it is expected to witness significant gains in the near term based on its revenue growth and earnings potential. So, let’s take a closer look.

Founded in 2009, The Trade Desk, Inc. (TTD) is a technology company that empowers buyers of advertising. Through its self-service, cloud-based platform, ad buyers can purchase and manage digital advertising campaigns across various advertising formats, including display and video, on a range of devices. TTD also provides data and other value-added services.

As the COVID-19 pandemic forced people to spend more time at home, businesses  vied  for digital ad space to reach more consumers. This helped drive  TTD’s 180.6% gain over the past year. However, the stock fell 17.5% after hitting its 52-week high of $972.80 on December 22, due to a broader market sell-off at the year-end.

Looking forward, as the economy gradually re-opens and severely hits industries such as travel and entertainment ramp up ad spending, TTD is expected to gain significantly. However, the company is facing stiff competition from its peers, which has made our proprietary rating system to rate the stock as “Neutral.”

Here is how our proprietary POWR Ratings system evaluates TTD:

Trade Grade: C

TTD is currently trading above its 200-day moving average of $606.17, but below its 50-day moving average of $875.30. The stock’s 15.9% loss over the past month reflects short-term bearishness.

The company’s revenue increased 31.6% year-over-year to $216.1 million for the third quarter ended September 30, 2020. TTD’s connected TV spend increased more than100% year-over-year, and mobile video spend increased roughly 70% year-over-year. Its non-GAAP net income increased 73.6% year-over-year to $62.7 million, yielding EPS of $1.27, which increased 69.3% year-over-year.

TTD has announced that all proposals from the company’s special meeting of stockholders, held on December 22, were approved. The five proposals voted on at the meeting were related to the company’s dual-class share structure, including the establishment of a new  termination date for the structure, as well as other corporate governance enhancements. The company announced on November 2 that Nielsen N.V. (NLSN) is supporting an industry-wide initiative, Unified ID 2.0, led by TTD, to replace third-party cookies. LiveRamp also joined in supporting the campaign on October 28.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, TTD is positioned unfavorably. The stock is currently trading 19.9% below its 52-week high of $972.80, which it hit on December 22.

The company’s net revenue has grown  at a CAGR of 38.1% over the past three years, while EBITDA increased at a CAGR of 17.8% over the same period. Also, its EPS has increased at a CAGR of 41.3% over the past three years. This can be attributed to TTD’s sustained consumer retention, which has remained at around 95% over the past five years.

Peer Grade: D

TTD is currently ranked #62  of 115 stocks in the Software - Application industry. Other popular stocks in the software - application group are DocuSign, Inc. (DOCU), Microsoft Corporation (MSFT), and Oracle Corporation (ORCL).

DOCU beat TTD, gaining more than 222% over the past year, while MSFT, and ORCL have returned 34.8%, and 15.8%, respectively, over the same period.

Industry Rank: B

The Software - Application industry is ranked #42  of the 123 industries. The companies in this industry design, develop, publish, and support software used to collect, store, report, and analyze data from various operations of a business.

While  companies in this industry have been witnessing increasing demand over the past few years, the pace has been accelerated by the rapid digitalization triggered by the pandemic. As the world is becoming increasingly dependent on data-based  decision making , this industry is expected to be in demand even after the economy gradually re-opens and normal activities resume .

Overall POWR Rating: C (Neutral)

Despite impressive performance in the last-reported quarter, TTD is rated “Neutral” due to its modest price performance in the short-term, and uncertainty related to its market dominance amid stiff competition.

Bottom Line

Even though the company faces strong competition, it has the potential to soar in the upcoming months based on its continued business growth, favorable earnings and revenue outlook, and strong financials.

The consensus revenue estimate of $1.08 billion for 2021 represents a  33.7% increase year-over-year. Moreover, TTD has an impressive earnings surprise history with the company beating consensus EPS estimates in each of the trailing four quarters. Its EPS is expected to grow 25.5% for the quarter ended December 31, 2020.

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TTD shares were trading at $806.52 per share on Tuesday afternoon, up $27.23 (+3.49%). Year-to-date, TTD has gained 0.69%, versus a 1.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.


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