The Trade Desk (TTD) is a stock I owned for most of 2018. They came on the scene at a very low valuation (just over 1B), even as they were growing like wildfire. They reported yesterday that revenue crested 308M for FY2017, and the market cap is now at 2.4B (good for a double if you bought a year ago).
I sold in early January, because I don’t know where this company fits in long term. I still don’t know where this company fits in long term. This isn’t sour grapes. In fact, I took a gamble that they would bounce a little on earnings, and bought call options. I got lucky…luckier than I expected, and so I sold those options this morning and was thrilled. Let me explain why I sold (again).
Today’s 20% bump is a little silly. Or you could say the 30% drop in the last few months was what was silly. I wouldn’t argue with that either. But I think both go to show that there’s not a lot of certainty to be found here. I simply cannot figure out how much value TTD is adding. I know that Jeff Green believes they are adding value. He is a masterful advocate for his company. I just don’t know if he’s right.
I have two more words for TTD bulls who see the 600%, 1000%, etc growth numbers for Connected TV, Audio, or what have you. SMALL BASE. Small base, small base, small base, small base, small base. If I sold $1 worth of bubble gum last year and $11 worth this year, I’m up 1000%. Do you want to invest in my bubble gum selling company? The only growth number that ultimately matters is the top line. Here’s what it’s done the last 4 quarters:
Mar 2017: revenue grew 76%!
Jun 2017: revenue grew 54% – still awesome
Sep 2017: revenue grew 50% – no complaints here
Dec 2017: revenue grew 42%
No one would ever say that 42% is bad, but it’s just over half what it was a few quarters ago. It is fair to say that the growth rate is slowing FAST. That fact tells a very different story than their gaudy triple digit segment growth numbers.
They have 657 active customers. They had 566 at the end of 2016. That’s 16% more customers in 12 months.
You have to look at all the numbers. Here are a few more from the December quarter.
Revenue: 102.6M (up 42% YoY), a slight beat (1M or so)
Adj. EPS: 0.54 (up 64% YoY), an 0.11 beat
So far so good…but…
Gross Profit: 81.5M, up 38% YoY
Ok, not quite as fast as revenue, but close…
Operating Expenses: 52.2M, up 49% YoY
Uh oh…revenue was up 42% and OpEx was up 49%…that’s not great.
Operating Income: 29.3M, up 22% YoY
There it is. WOAH. 22%???
Let me stop for a minute an explain why I’m not excited about that 64% growth in EPS. Sounds AMAZING…but do you see what really happened? Operating Profit was up 22%. They turned 42% revenue growth into 22% operating profit growth, but then through some accounting (paying more SBC and less income tax) showed 64% EPS growth.
When you look at ALL the numbers, you see the real story – they’re growing less and it’s costing them more. So before you jump on me and scream, “It’s a GROWTH company,” hear me out. I’m fine with spending to grow! If they can turn the OpEx into faster growth, great – but growth is slowing down!
The Trade Desk isn’t down and out by any means. They’re still growing…just not as fast as they used to be. They had a fine year, yes. But is this the bargain of a lifetime? A foregone conclusion? A destined long run success? I’m just not so sure.