“The Trade Desk outpaced nearly all areas of digital advertising in 2022, with 32% revenue growth year over year, and a record $491 million of revenue in the fourth quarter alone. This performance was underscored by significant profitability and cash flow. In an unpredictable macro environment, our growing relationships with agencies and brands is testament to the value of the open internet over the limitations of walled gardens,” said Jeff Green, founder and CEO of The Trade Desk.
I was on the call, but was also multitasking on a busy morning, so I’ll be anxious to read the transcript in more detail. A few things jumped out at me.
The number of times Unified Identity 2.0 (UID2) was mentioned as foundational to their success was staggering. It really appears to be a game-changer. They rolled it out as a response to Apple announcing it would not support cookies, and the technology is working as intended and drawing in lots of large customers as a result.
CEO Jeff Green, who is a master communicator, mentioned several times that their only real competition was a technology invented in the 1960’s.
They believe 2023 will be a tipping point for the adoption of Connected TV (CTV) and they sit as the clear leader in the ad tech space to benefit. Their TAM is increasing.
There was a good bit of conversation about the downside for advertisers within walled gardens and the DOJ case against Google in particular. Green believes that TTD wins no matter how that case is resolved.
As with so many of our companies, the secret sauce for TTD, and especially the UID2 technology, is real-time data. CTV is verifying who is watching pretty much constantly, UID2 protects the identity of those viewers, which provides exactly what advertisers need to spend effectively while protecting the thing users care about most.
The old model (the one from the 60’s) has brands paying up front for a year. With real-time data flowing in from CTV, the exponential increase in those who consume TV that way, combined with the opaque nature of advertising with walled gardens, makes the switch to TTD a no-brainer.
The quarter was strong financially. Not perfect, but strong, especially given the macro. What they’re seeing in Q1 so far is encouraging.
They didn’t dwell on it, but they announced a $700 million share repurchase program.
That’s very broad from someone who was only half-listening, but lots of analysts offered congratulations and the stock price is up 25% so far this morning. That bumps up my TTD holding to a 15.62% position in my portfolio, behind only Cloudflare (NET) by only .10%.
(Upstart also released a not-horrible quarter but abysmal guide last night. But apparently it was enough to make people realize that UPST is not, in fact, going to zero, as they continue to add partners and their loan performance continues to outperform FICO, even if people are too afraid to buy them in this macro. My stubbornly-held position there is up 25% this morning. I expect a lot of that is short covering.)
My current portfolio weighting:
MQ: 1.09% (Initiated in January. I used to hold it until they announced the CEO was stepping down with no successor identified several quarters ago. The new hire was announced this quarter, so I’m just trying out a position again.)
AI: 0.90% (The position I hold for my brother)
I like to invest in companies with great CEOs. Jeff Green is one of them. You know you’ve got the best and brightest AND STEADIEST at the helm. It’s why I avoid TSLA and invest in companies run by guys like Jeff, Huang, Pommels, Slootman and Kurtz.
I just got around the reading the transcript and diving in.
Trade desk continues in its transition from hyper growth to just “high growth”. Its valuation makes no sense in the context of growth, people are valuing the company based upon its cash generation and competitive moat (strong).
The numbers. Revenue grew to 490.7M. The sequential quarter comparison is meaningless as the company is seasonal with Q4 being its high quarter. Q4 was up 24% year over year. For the full year, TTD grew 32%.
Cash flow from operations for the quarter continued to grow, but only up 6% from the year ago period to 173M. Cash flow for the entire year grew 45% however (cashflow on a quarterly basis is always very lumpy and not hugely connected to business progress when looked at Q by Q). Cash flow grew year over year faster than revenue generation, so there appears to be some leverage.
I struggle with its valuation. The company’s P/S trailing is 19.5. This puts it on-par with DDOG. Its cash from operations (trailing) is 620 versus DDOG’s 420. But DDOG is growing significantly faster, a bit less than double in recent years/quarters. OR, take CRWD, much faster growing than TTD and its P/S trailing is 14.
TTD is showing the slowest annual growth in history other than the covid year, 2020. It has however shown the ability to accelerate from year to year historically. Its customer retention is strong at over 95%. Advertising is the first thing that gets slashed in the downturn. Most ad stocks have been taken to the woodshed.
I think it deserves its place with the low allocation in my portfolio, but I will move the money out if I find something better. Maybe into more of my other holdings mentioned here (CRWD or DDOG, cash gushers with big growth still ahead).
Hi Rob, I don‘t follow the company that closely so apologies if I’m getting this wrong. From reading the press release I thought TTD grew 24% YoY this quarter. The 32% you mentioned is for the full year 2022 if I’m not mistaken. Is that right?
This maybe true Rob but and I appreciate the irony of making this point on Saul’s board but TTD is also:
Operating at a 50% adjusted EBITDA margin for Q4 and 42% for the year
Sporting $1.04 in non-GAAP diluted EPS and valued at a P/E of 64 and that’s after today’s rise
Producing $549m of cash from operations off $1.58bn revenue (34.8%), (vs DDOG’s $420m from $1.53bn or 27.4%)
I really don’t believe that The Trade Desk’s valuation is best reflected or relied on using a P/S ratio given both the earnings and the cash it is producing.
Also the Q1 guidance comes off the back of a 43% growth compare with a year ago’s Q1 so that isn’t really helping the immediate numbers looking forwards.
100% agreed the guidance doesn’t really fit with hyper growth or even the rest of a Saul method stock portfolio and the P/S would naturally look elevated compared with its growth cohort. But given the maturity in its lifecycle, its profitability and cash production and the fact that no other SaaS stock comes close to having a TAM as large as the $800bn+ ad market (besides eCommerce potentially), then comparing P/S with its growth cohort really doesn’t make sense - which is why it has remained a >10% holding for me.
I am though tempted to take some money off the table and switch to other much higher growth stocks that are still far below their deserved valuations at this point, (Sentinel One, Monday and Bill come to mind).
TTD is still in my top 3 holding and high confidence for me but I trimmed 15% on this post earnings bump to top up:
Bill (in light of every other ER, I have re-evaluated Bill)
Digital Ocean (whose own report was excellent and is a profit and cash machine already)*
Sentinel One (still a fast grower and extremely undervalued)
SoFi (a fast growing, well run and undervalued digital banking play).
I haven’t felt strongly compelled to push Digital Ocean as it was only a mid tier growth story but since the top tier has lowered its growth rate so much, then this doesn’t feel so out of touch. Digital Ocean is an SMB IaaS/PaaS player that just delivered 37% growth in Q4, (33%+ organic) and has reached substantial levels of FCF and EBITDA already after exhibiting significant land and expand success as well as pricing power. They are forecasting 20%+ FCF for the next year and although growth guidance is 29% in Q1 and 23.5% for the year (which they have tended to beat), the profit and FCF guidance is immense. Reactions to their results were very positive (up 7% on a massively down day).
EBITDA is lower on the income statement (more costs have been taken out of the number) than Operating Income. Despite this, TTD’s number is twice that of DDOG in the latest quarter. Also, TTD is profitable now.
I have positions in both companies but feel the need to be a bit more careful about DDOG.
Nope, it’s higher. Operating Income is equivalent to EBIT, which is after deducting D&A (depreciation & amortization). EBITDA is before deducting D&A, hence, higher up on the I/S (and higher as amount, by definition).