The Trade Desk (NASDAQ:TTD) delivered better-than-expected Q2 results and guidance, which saw its shares jump 7% after hours.
The takeaway here is that its revenue growth rates are higher than I expected, which means that its momentum could remain strong into 2025. Therefore, the debt-free business is priced at 26x forward EBITDA, a multiple that is slightly cheaper than I previously expected. And yet, I still consider this stock to carry a rich price tag.
I don’t believe this stock offers investors a satisfactory risk-reward. Being asked to pay $100 per share for TTD is too much for me.
Author’s work on TTD
The Trade Desk is a stock that I’ve considered fairly valued for a long while. And even though these results are better than I expected, I still believe that its upside potential is muted. Here’s why.
The Trade Desk’s Near-Term Prospects
The Trade Desk enables advertisers to buy and manage digital advertising space with precision and efficiency. Their platform helps advertisers select where to place ads, analyze data to target specific audiences, and optimize campaigns for better results. Specializing in Connected TV and retail media, The Trade Desk aims to make advertising more personalized and effective for brands.
The Trade Desk has demonstrated robust growth, with Q2 revenues significantly outpacing the digital marketing industry. This success is attributed to their consistent innovation, particularly in areas like CTV, which is seeing accelerated growth.
The company’s ability to consistently deliver over 20% revenue growth y/y showcases its strong market positioning and the value it brings to clients.
The adoption of advanced identity solutions like UID2, combined with new product innovations like the Kokai platform, ensures that The Trade Desk remains a crucial partner for brands navigating an evolving advertising landscape, irrespective of cookie deprecation.
Nonetheless, The Trade Desk faces headwinds. First, the macroeconomic environment presents challenges such as unpredictable consumer demand. These factors create uncertainty for marketing officers, who are pressured to demonstrate tangible ROI on their marketing spend.
Secondly, the competitive landscape in digital advertising is intensifying. The rise of major players like Amazon (AMZN) Prime Video in the ad business introduces new competition that could impact pricing and ad budget allocations.
Given this balanced background, let’s now discuss its fundamentals.
Revenue Growth Rates May Reach 30% CAGR in H2 2024
TTD revenue growth rates
The Trade Desk’s Q3 2024 guidance implies that The Trade Desk could end up delivering 30% y/y revenue growth rates in Q4 2024, and possibly reaching this figure in Q3 2024 too.
What this means in practice is that the best-case scenario for the Trade Desk is playing out.
And yet, for my part, I continue to be astounded by the market’s appetite for The Trade Desk, when AppLovin (APP) is not only delivering higher revenues right now, but also growing so much faster, with its outlook for Q3 pointing to approximately 32% y/y revenue growth rates.
One possible rationale for this wide discrepancy between TTD and APP has to boil down to the fact that AppLovin’s CEO Adam Foroughi is not an overpromotional CEO when we compare against Jeff Green. That’s not to say that there’s anything wrong with that strategy, but these are the facts for what they are.
As a point of reference, consider that on SA, there are 22K people interested in AppLovin while TTD has more than 3 times the following at 88K.
In sum, I believe that investors can most likely count on The Trade Desk to succeed in reaccelerating its revenue growth rates back to the high-20s% CAGR in the medium term. With that in mind, let’s discuss its valuation.
TTD Stock Valuation – 26x Forward EBITDA
In my previous analysis, I said:
We know that The Trade Desk is on a path for $400 million of EBITDA in H1 2024. We also know that Q4 of each year is a seasonally strong quarter for advertising stocks, so we must factor in that aspect too.
Hence, I believe that The Trade Desk will achieve at least $1 billion of EBITDA in 2024, and might even exceed expectations by reaching $1.1 billion.
That question though, is whether the market is able to get enough conviction of The Trade Desk being on a path towards $1.5 billion of EBITDA in 2025?
Indeed, considering The Trade Desk’s nine months of 2024 EBITDA, the company is on a path to $685 million. Consequently, I am reassured that my previous estimates were in the correct ballpark, and I reaffirm my thesis that The Trade Desk will deliver around $1.1 billion of EBITDA in 2024.
And yet, given its slightly increased growth potential, the outlook improves for shareholders. Therefore, I now revise my 2025 EBITDA estimate upwards from $1.5 billion to $1.6 billion.
This means that TTD is priced at approximately 26x next year’s EBITDA, a multiple that I believe puts The Trade Desk at a fair price.
For context, compared to AppLovin, which is priced at approximately 10x forward free cash flow, The Trade Desk actually appears to be trading at a rich valuation.
All that being said, the advantage that The Trade Desk has over AppLovin, is that for now, AppLovin carries a small amount of debt, while The Trade Desk operates debt-free. On the other hand, note that AppLovin is buying back its shares and its share count has come down in the past year — the same cannot be said about The Trade Desk, since its share count was unchanged y/y, despite its buyback program.
The Bottom Line
Given The Trade Desk’s impressive Q2 results and strong guidance, a valuation of 26x forward EBITDA can be seen as fair.
This reflects the company’s robust revenue growth and innovative advancements in areas such as CTV and retail media.
However, despite this fair valuation, the upside prospects for its stock remain unenticing. The macroeconomic challenges and intensifying competition dampen the stock’s potential.
Moreover, while The Trade Desk operates debt-free, its rich valuation relative to competitors like AppLovin, which trades at a significantly lower multiple, suggests limited room for price appreciation.
Despite The Trade Desk’s ability to help advertisers fine-tune their campaigns with precision, its stock appears to have already placed its ”highest bid”!
