News and new look at The Trade Desk

Investment Analysis Clubs Saul’s Investing Discussions
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TTD is up over 12% at the time of this posting mostly because Google announced its Chrome browser will delay fully blocking tracking cookies until late 2023 – an extension of almost 2 years. Although TTD had come up with its own work-around plan for tracking cookies, the market was uncertain how effective it would be. For now, this “problem” has been alleviated for a couple of years.

TTD had some other recent positives. One is the 10 for 1 stock split, which as I explained in my post of May 12th https://discussion.fool.com/positive-effects-of-ttd-stock-split-… is likely to boost the stock price. That split has now taken effect.

Another positive for TTD is its improved revenue/profit outlook. Ron and the discussion that followed thoroughly laid out first quarter results on May 10th. https://discussion.fool.com/the-trade-desk-ttd-earnings-34829337…

Here’s a quick recap of Q1 results. Sequential revenues were down; but for TTD, they always are in Q1. YoY revenues grew 37%. For Q2, the company projects a 19% sequential and an 87% YoY revenue increase…

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  1. “TTD is up over 12%…delay fully blocking tracking cookies until late 2023”

Pop on news is irrelevant, especially when it is attributed to a temporary lifting of a negative catalyst that will come back. Nothing here would make me want to invest longer term.

  1. “One is the 10 for 1 stock split”

Stock splits are a non-event with a temporary price change at most but no material change to the underlying company. If anything they are net-negative since they cost money to execute. They simply change the number of cuts in the pie. For as long as I have been investing (even going back to tracking stocks in an 8th grade project back when we had to check newspaper listings for prices) people have thought stock splits were a big deal, like you were getting something when they happened (I still remember all the talk about Mc Donalds and IBM splits). Again, this is a share price concern and not at all about the underlying company.

  1. “Here’s a quick recap of Q1 results. … the company projects a 19% sequential and an 87% YoY revenue increase…”

Scanning the posts it looks like people believe they may optimistically grow revenue at 42% YoY and at margins worse than many other companies we follow. I saw a lot of numbers related to different valuation ratios and such but couldn’t find this 87% growth number. Looking at the source: https://investors.thetradedesk.com/static-files/a9fc5d9e-7f6…

Three Months Ended March 31,

             2021        2020
Revenue    $219,811    $160,660
*Financial Guidance:*

Our business has been impacted by the COVID-19 pandemic that has significantly impacted advertiser demand. Like many companies that are ad-funded, we are facing a period of higher uncertainty in our business outlook. We expect our business performance could be impacted by issues beyond our control, such as changing economic conditions or additional shelter-in-place orders that may or may not occur. Assuming that the economy continues to recover and we do not have any major COVID-19 related setbacks that may cause economic conditions to deteriorate, we estimate the following:

Second Quarter 2021 outlook summary:

Revenue range between $259 million and $262 million

This bolded text sounds so negative, but perhaps it is just disclaimer copy. If that number there IS for the next quarter’s revenue it does look like a 19%+ QoQ increase! I’d have to look deeper to know what this means longer term though, seasonally, etc. I just haven’t charted the numbers to see how to apply this number. I guess if last quarter was negative and this is a one-Q-pop then they could still end up at that 41% range but again, I have not looked at all, so …grain of salt and all that.

Thoughts?

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Regarding stock splits, research shows they have a beneficial effect on stock price. Rightline.net states that stock splits have salutary effects for next 3 years after the split. http://www.rightline.net/splits/
“A 1996 study by David Ikenberry of Rice University measured the short and long-term performance of stock splits. His research included all the 1,275 companies whose stock split 2-for-1 between 1975 and 1990. Mr. Ikenberry compared the split stocks to a control group of stocks for similar-sized companies in similar sectors that had not split. His results were startling. The split stock group performed 8% better than the control group after one year, and 16% better after three years.

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Pop on news is irrelevant, especially when it is attributed to a temporary lifting of a negative catalyst that will come back. Nothing here would make me want to invest longer term.

You’re taking Google’s statement at face value when it’s really an attempt by Google to save face. I view it as tacit acknowledgement that their plan wasn’t going to work and they to rethink it. Remember, this isn’t just a month or a quarter delay.

Stock splits are a non-event with a temporary price change at most but no material change to the underlying company.

Splits express confidence by management in the company’s future and history shows the vast majority of splits are harbingers of future price appreciation.

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This bolded text sounds so negative, but perhaps it is just disclaimer copy. If that number there IS for the next quarter’s revenue it does look like a 19%+ QoQ increase! I’d have to look deeper to know what this means longer term though, seasonally, etc. I just haven’t charted the numbers to see how to apply this number.


Y        Q1    Q2    Q3    Q4    FY   FY growth
2018    86M   112M  119M  161M	 477M    55%
2019	121M  160M  164M  216M   661M   38.5%
2020	161M  139M  216M  320M   836M   26.5%
2021	220M  261

According to guidance for Q2 revenue, it is 87.8% increase YoY. However this is due to a covid affected Q2 in 2020. If you compare it to Q2’19 it comes down to 39% or annualized to 17.7% YoY. Make of it what you will.

If you look at pre-covid numbers as well, it definitely seems to be on a slowing growth trend (mid-30’s). However I still have a 2.5% position purely due to it’s profitability off of such a low base of revenue.

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Trade Desk is one of my larger positions, so bear that in mind, but I would have a hard time seeing today’s news as anything other than a major positive for TTD.

I agree that the recent stock split, in the long term, will be a non-event. Shorter term, it allows some investors to more easily do some things with stock options that can have a real impact on the stock price, but that’s a discussion for another board.

The Trade Desk is already the leading independent demand side platform today. Despite investing heavily for growth every year, they’ve been consistently profitable for the past several years. They’re they ones leading the effort for a new Unified ID 2.0 to replace 3rd party cookies (although as noted above, a big question will be how widely that new ID gets adopted/embraced in the future), and I personally see them continuing to grow and take market share even in a post-cookie world, not to mention riding the wave as more and more traditional advertising moves to programmatic (maybe eventually all 100% of it, as Magnite’s CEO said recently) in coming years. I’m not convinced that cookies eventually going away is even going to be a “negative catalyst” for the Trade Desk. They’re probably going to be able to adjust to a new way to target ads a lot better than smaller players will, potentially increasing their market share further as a result.

Now Google’s 2 year (at least, for now) delay in phasing out cookies is going to enable TTD to continue to use all of their existing advantages through to late 2023, and seems to me will be like pouring fuel on The Trade Desk’s profitable growth story for that stretch. I’m really not surprised by Google’s announcement. Advertising is their cash cow and still relies heavily on third party cookies. For them to cave to pressure to cut cookies loose before they have a viable alternative would simply be self sabotage. I really won’t be surprised at all of they ultimately push this back multiple years further than 2023.

But one of the most important pieces to this story, as Smorg emphasized above, is what Google announcement really tells us. And that is that they haven’t been able to come up with a good alternative to cookies, and they think it’s going to be a few years, probably in their best case scenario, when they might have one. No question, Google definitely prefers not to go along with Unified ID 2.0 because it doesn’t give Google advantages. They want the deck stacked in their favor to target ads better than their competitors, so that they can charge more and make more money, and Unified ID 2.0 would create more of a level playing field, which of course would be a good thing for TTD and other independent platforms.

Regardless, I really think TTD CEO Jeff Green has his finger on the pulse of where things are headed unlike anyone else, and will enable the Trade Desk to adjust to whatever the future holds. He was probably the only one saying, as recently as in TTD’s August 2020 earnings conference call last year

“I’m still not convinced that Google, in the end, will get rid of third-party cookies”

which a lot of people thought sounded kind of crazy at the time, but here we are now (at least) pushing the timeline back a couple more years.

Looking at trending quarterly data, as noted above, is going to look very different for TTD, which had major headwinds from the pandemic in 2020, compared to looking at similar data for other companies we follow on this board that had tailwinds last year. Despite that, TTD still grew at +26% last year. This year’s 2021 growth will therefore be much higher, as Millenial noted, (Q2 could be close to +100%) due to the comparisons to the covid-impacted periods in 2020. I can definitely see them growing at around +40%, or more, in 2022 next year (and beyond) as well.

Before today, I felt that TTD’s stock price was really cheap for a leader, with that kind of growth, plus consistent profitability, in the accelerating segments (primarily programmatic, as well as CTV) of the huge overall advertising industry, that is just taking over more and more of that overall advertising pie, and they’ve still barely scratched the surface internationally. And after today’s move, I still the valuation is cheap. The Trade Desk remains a ride I want to be on for the next several years, and I consider today’s Google announcement to be pretty darn significant looking forward.

-mekong

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Look, this thread is labeled a “new look at The Trade Desk”, so when I replied above I started with the question, “Taking these points in to consideration, would this be a company I would start investing in today?” So my words were all in answer to this question. In summary…

  1. This news is not enough to get me to buy. I still need the numbers to work. News like acquisitions or partnerships or new verticals can have major impacts on businesses. This news strikes me more as watching a situation that could affect business rather than something that could be a catalyst strong enough to alter the numbers.
  2. The numbers are not better than all of my current holdings, so I pass.

…that is really all there was behind my reply. I hope that helps add some context to my reaction to the news-related-points and why I said what I did.

On The Splitting of Shares…
I was tempted to skip this part of my reply but this is a “pet peeve” of mine. I’ll put this as bluntly as I can: Stock splits do NOT have a meaningful effect on stock price performance. They are, exactly, an event where a company pays people to execute a one-time slice of their market cap in to a different number of shares. Period. Everything else is just using patterns in data to justify conclusions that do not make sense. The fact is, a company that splits its stock was growing anyway or its share price would not have gone up enough for management to care enough to take action in the first place. That does NOT mean it is foretelling the future. A company that was doing well is likely to continue to do well but this has NOTHING to do with the share-splitting event. The success would likely have happened anyway. Otherwise all companies would just pay for share splits to drive their stock price up for 3 years. It is investment placebo.

Sure more people can buy options since that is based on 100 shares but I don’t believe that will move the market in a way that is interesting to me as an investor.

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have not seen anyone mention the opening of TTD in India, with Tejinder Gill as manager of India, per the TTD investor relations website. Might be a factor also. Dated 6/16/2021.

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I am newer to the board and am not as seasoned as many of you are. I am truly grateful for all the contributions you all make. TTD seems to fit a question that has been nagging me about the whole Rev/growth new product offerings/ARR/Saas philosophy. One of the metrics of TTD that seems to be very attractive is that they have a 32% Operating Margin. Unlike many of the companies we look at who have very high rev growth/ARR, etc. TTD has a positive bottom line.

It seems to me that when the growth company starts to actually make money on the bottom line, they become less attractive to Mr. Market. This is obviously my limited view of things based on my limited amount of time with growth companies.

Now I understand from reading the knowledge base that a company whose revs are beginning to slow is a time when we would possibly take profits and maybe look for other issues whose growth is more attractive. I know this may sound a little crazy, but do companies begin to look less attractive when they begin to show a positive bottom line? Do we take into consideration profitability at some point or are we looking at top line fairly exclusively?

Any help would be appreciated.

Thank you,

FP

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It seems to me that when the growth company starts to actually make money on the bottom line, they become less attractive to Mr. Market. …Now I understand from reading the knowledge base that a company whose revs are beginning to slow is a time when we would possibly take profits and maybe look for other issues whose growth is more attractive. I know this may sound a little crazy, but do companies begin to look less attractive when they begin to show a positive bottom line?

I don’t think it sounds crazy. I think a lot of times we see more profit start to drop to the bottom line when growth starts to slow. I think it’s the slowing revenue growth (not the coinciding bottom line growth) that’s the problem – so you kind of answered your own question above.

That said, there are some rare birds like Docusign, Datadog, Crowdstrike, and Upstart (my top 4 positions at present) that can start dropping considerable $$ to the bottom line and still hyper-grow the top line (revenue). That’s the sweet spot!

Do we take into consideration profitability at some point or are we looking at top line fairly exclusively?

Yes, profitability always needs to be taken into account on some level – but we need to be forward looking and predictive, because the market always is. In other words, we don’t wait for tons of EPS and then buy. As we discussed above – by this time, often hypergrowth is over. So (especially for SaaS companies) we need to look at gross margin (often 70 to 80% or better) and make sure Operating Expenses and Free Cash Flow losses aren’t completely silly out of control. If those things are in place, bottom line profit is likely just a matter of time.

Bear

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“do companies begin to look less attractive when they begin to show a positive bottom line? Do we take into consideration profitability at some point or are we looking at top line fairly exclusively”

Great question! Paul already answered it quite well. I just want to echo the point that being profitable is not related to attractiveness directly. It is like any statistic or ratio, it needs other things to give it context to have any real meaning. The way I look at it is this:

A company that is doing a very good job of balancing reinvestment and spending will not make or lose any money.

Real life is messy though. One company may spend a more than they make in a one-time event like an acquisition. Another may choose a strategy involving a longer-term calculated cash burn. The key for me is that they never get in to a dangerous situation. This isn’t unlike the decisions we make as investors. We don’t want to ever be over-extended in any way and be put in a situation where we are forced to make decisions that are not good for us. I look at company spending the same way. Go ahead and spend as much as you can to fuel growth without losing control! BUT, each situation is a little different…it depends.

The end goal is to build a huge company making huge amounts of revenue so that as spending slows profitability grows. While it is true that it is healthy for this to happen because a company is exiting a hyper-growth phase, it doesn’t have to be true. As long as it isn’t because management doesn’t know how to spend their resources wisely, it is probably healthy. So back to “it depends”, if a company is very profitable, I actually question whether they should be, just like I would if they were burning money too fast.

So again, while increased profitability (or the addition of a dividend for that matter) CAN coincide with slowing growth due to maturity (saturation of current TAM or just growing so large that it becomes nearly impossible to expand at the same rate, which means they are reaching the end of the hyper-growth curve), which IN-TURN can make it less attractive as an investment, it doesn’t have to be. profitability is just one more metric that needs to be questioned and compared to other parts of the business and not something that makes or breaks an investment on its own.

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