Trade Desk Just Got a Lot More Expensive. It's Still a Buy

Trade Desk (TTD) reported better-than-expected Q4 2022 results Wednesday before the markets opened. The news was excellent, with adjusted Ebitda in the fourth quarter beating the analyst consensus estimate. In addition, the company’s Q1 2023 adjusted Ebitda forecast was also ahead of analyst expectations.   

On a day that looks as though stock prices will fall due to positive economic news signaling the Federal Reserve will likely keep hiking interest rates further into 2023, Trade Desk’s optimistic report is a breath of fresh air. 

TTD stock opened Wednesday up 18% to nearly $60. Who knows where it will end up? However, should TTD close near $60, I don’t think long-term investors should be concerned about buying at these prices. 

Here’s why. 

Trade Desk Remains Relatively Cheap

Let’s assume TTD closes Wednesday trading at $60. That’s a 36% gain in 2023, and we’re only six weeks or so into the new year. However, it remains down nearly 26% over the past year and 47% from its October 2021 all-time high of $114.09.

Sure, most tech stocks were overheated back then, so it’s fair to say that $114.09 was great pricing from investors. But, I don’t think it would be out of line to suggest a 25% gain over the next 12 months to $75 is more than possible. 

Let’s consider a theoretical $75 target price. 

According to the Barchart.com average analyst ratings, 16 Wall Street pros give Trade Desk a Moderate Buy (4.25 out of 5) with a high target of $100, a low of $43, and a mean price of $63.38. If today’s action holds up, we’re almost at the mean target with 10 months left in the year. 

With an excellent report, it will be hard for analysts to maintain their target prices at current prices. But forget about that for a second, and consider its current valuation based on a $60 share price.  

The company reported its Q4 2022 results this morning. As I said earlier, it exceeded adjusted Ebitda estimates from analysts. On the bottom line, it earned $245 million in adjusted Ebitda from $491 million in revenue. That was $15 million higher than the consensus estimate and 28% better than a year earlier. 

Even better, it forecasted adjusted Ebitda in Q1 2023 of $78 million ($2.6 million ahead of analysts) from $363 million in revenue. That’s an adjusted Ebitda margin of 21.5%, well below its Q4 2022 margin of 50% and 38% in Q1 2022. Moreover, it’s far less than even Q1 2021, which was 32%.

It’s considering the possibility of a recession in the next 3-6 months. However, the latest economic data suggests it might be way too pessimistic. 

In 2022, it reported $522 million ($1.04 a share) in non-GAAP net income from $1.58 billion in revenue. So, at $60, it’s trading at 19x sales and 58x earnings per share. 

Seems high in this environment? Maybe. 

However, the company’s price-to-sales ratio over the past five years averaged 25.4x, according to Morningstar.com, while its price-to-forward earnings averaged 88.8x. 

So, as the business continues to grow, multiple expansion is still in the realm of possibility. 

A Possible Transformative Acquisition

Digiday published an article today that inspired writing about Trade Desk. But, of course, the excellent earnings report was the cherry on top of the sundae. 

The gist of the Digiday piece was that Criteo (CRTO), an ad tech company that specializes in helping more than 175 retailers and 1,800 brands get their names out there, would be a very transformative acquisition for Trade Desk. 

Trade Desk primarily works with agencies, while Criteo goes directly to the brands. Together, they would be very competitive in all aspects of programmatic advertising. In addition, Criteo owns IPONWEB, a global leader in real-time advertising technology. Most commerce media lean on IPONWEB to get the job done. 

And, as the piece points out, it generates significant free cash flow. In 2022, it generated $200.1 million in free cash flow from $2.02 billion in revenue, a 10% margin. So, even though it had $237 million less revenue in the latest year, it generated 19% more free cash flow.

Adding Criteo would be immediately accretive to earnings while delivering a stronger selling proposition with advertisers. 

According to Digiday contributor Seb Joseph, the downside is merging the two corporate cultures. It’s never easy, and that is why many acquisitions fail. Trade Desk wasn’t built on significant acquisitions. Doing the deal “moves The Trade Desk into uncharted territory as a result.”

Joseph reminds readers that Apple’s crackdown on granular tracking, combined with a similar push from Google and others, could devalue Criteo’s treasure chest of shopper data. 

In other words, if it pays $3.3 billion for Criteo (a 50% premium to its current market cap), and the shopper data becomes much less valuable due to ongoing privacy enforcement by Apple and Google, it will have a significant goodwill impairment on its hands in 2-3 years. 

That said, there are enough positives to come out of a deal, including, according to Joseph, the coming together of two excellent management teams. Of course, you can never have enough talent on your bench.

As I write this in late-Morning trading, TTD is $2.50 above a $60 share price. So buy some now and more later, should it retreat in the next few weeks.

Long-term, it’s hard not to like Trade Desk’s business and stock.  

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