With COVID-19 slowing down advertising budgets, and political tensions around the use of advertising, remarketing, and customer data, it is a tense time to be assessing a company involved in the world of marketing. However, that is what I intend to do. Look at the fundamentals and figure out if this is a long term business worth investing in.
What Does Trade Desk Do?
The Trade Desk is a company which helps advertisers get more for their money. By using proprietary data, brands can use a fully automated, or programmatic means, to purchase advertising on various media to find consumers that fit.
If you have never heard of programmatic advertising, the example you will know (and maybe not love) is Google and Facebook advertising. These are both examples of programmatic adverts. You see ads based on real-time data, your demographic, current trends, budgets, time of day, and even based on your local weather. These ads launch in seconds can be turned off at any point in time, and most importantly, are measurable.
Programmatic advertising came into its own after the 2008 recession when companies suddenly had to prove how they use their advertising budgets and what works. Data led advertising has been disrupted over 10 years ago, and we are very much looking at the decline at “spray-and-pray” advertising, traditional TV ads which can’t be measured or interacted with, static billboards, even your regular poster pinups.
Source: Smart Insights
Trade Desk came to live in 2009, and they still have the founder running the business. They saw early opportunities for a data lead advertising platform. Their solution allows for programmatic ads across a range of mediums, they integrate into the likes of Google, Facebook, TikTok, even Connected TV (CTV is streaming with ads.) As a customer, you use Trade Desk to set up your target customers, how you want to reach them, dynamic define budgets and create a single advertising experience across multiple channels. In return, Trade Desk takes a cut of the fees paid. The key is volume. The more ads you run, the more people that see it, the more targetted your adverts the price increases.
This isn’t a typical advertising company where you score a handful of massive long term contracts. They need volume and engagement. Advertisers can very easily get started, but just as easily stop. This is the double edge sword of programmatic advertising.
Source: The Trade Desk Q1 Announcement
With offices in various cities in North America, Europe, Asia and Australia, Trade Desk considers themselves a technology company that empowers buyers of advertising. They offer a self-service cloud-based platform where customers (buyers) can create, manage, and optimize data-driven digital advertising campaigns across ad formats, including display, video, audio, native and, social, on a multitude of devices, such as computers, mobile devices, and connected TV. A whole lot of tech powering your complete digital advertising strategy with less staff. You can see why this is such an attractive proposition to their customers. If traditional TV ads require signed agreements months in advance and offer no measurement or data feedback, you can see the appeal.
What Do The Fundamentals Tell Us?
While doing some research into Trade Desk I spent some time reading their prepared statements, and quarterly reports. One aspect of the business stood out to me. They value above all else, self-sustainability, which directly relates to keeping the company cash-rich and resistant.
Source: Genuine Impact
It’s always good to see intent translating into fact. From a relative perspective, Trade Desk is in the top 20% of companies in terms of their financial strength, but are extremely expensive, and have weak future growth. Let’s dive into the raw number to better understand why this is, and what this means as an investment.
It’s worth noting the company has been hit hard by COVID-19. While they opened the year on a high (33% ahead) this quickly dried up as all advertisers pulled their budgets. Some customers completely stopping all expense, while others moved to a light brand presence rather than a promotional stance. This meant April has some horrific numbers to report, while it stabilised and is slowly coming back, their business is at a low right now.
Source: Trade Desk Q1 Revenue
From a revenue standpoint, we have seen a quarter on quarter reliable increase. COVID-19 means the last reported quarter and likely the next we will see a decrease in their revenue figures.
Taking a step back to the annual figures, Trade Desk claim their biggest strength is their financial position. With a profit margin of 16.39%, this isn’t the most impressive in the market and it highlights some big R&D tech spending. While they might sit in the advertising space they are truly a tech investment. Like most tech investments they pour money into R&D to keep their competitive edge. Such heavy investment into innovation and staying ahead, as well as big spending on marketing, it’s very fair to say Trade Desk doesn’t have a defensible moat in the sense they could ease their additional spending and retain their position. While customer churn might impressive, this could be disrupted by newer more operational efficient entries.
What did impress me was the debt management. The last few technology companies were drowning in debt. Trade Desk has drawn down $143m under their credit facility as a precautionary measure, leaving them with an impressive $325.2m in cash and cash-like investments.
Even accounting for this the quarterly numbers still appear very stable, with a debt to assets of 61.86%
In terms of liabilities, the only debt on the Q1 sheet is the credit facility drawdown. The real risks come in the expenses and liabilities from their customers who have different terms, creating $947.9m in accounts receivable with $663.4m in accounts payable. The result is a particularly debt-free business, which explains the extremely strong financial strength of the business. Rather than owning to suppliers, it’s chasing your customers to pay the bills before you incur the costs.
Source: Yahoo Finance
In terms of a value purchase. We are trading at all-time high levels, with a P/E ratio of 113.67x, and with the more generous price to sales ratio of 19.67x. As Trade Desk is a technology company, how much is that tech worth? They are not unique in the market, and they face threats from the very networks they collaborate with.
In my mind, you don’t have to worry about Warren Buffett suddenly showing up and sinking a few million into Trade Desk. While the company is extremely proud of its ability to self fund their growth and development, that has been realised by the rest of the market some time ago.
A few weeks ago this would have been a more interesting momentum play, but only at the lowest points would this have been a viable value investment. A few companies I’ve looked at have claimed they are more like industry X but make no mistake, Trade Desk is a technology company.
To round out the assessment we must gauge the momentum and future growth potential of Trade Desk. I’ll be leaning on the sell-side analysts for this view.
Source: Genuine Impact
The analysts have been shifting from a strong buy in the previous months to settling on some slight optimism but largely a hold rating. What I found interesting was the number of share price targets which have been hit or are now close, meaning the analyst needs to reassess. Given what is happening in the market, I can forgive the sell-side analysts for being busier than usual.
To help take their views into context with where we are now, I wanted to judge the future revenues, EPS, and target price.
Source: Genuine Impact
With a better than average expected growth, but an extremely low expected return means the market considers Trade Desk’s future revenue to be in line with expectations and very achievable, this also correlates with the speedy share price recovery.
I wanted to see the target prices myself before making any final decisions.
Source: Market Beat
The average target price is a 12.70% decrease. With such a speedy and aggressive bull run, Trade Desk has blown away expectations. What we are left with is a bunch of unknown positions. The fundamental calculations aren’t adding up and we are now investing based on business as usual meaning we will open the advertising taps with greater gusto.
Source: Trade Desk Q1 Revenue
With such a heavy dependency on America, we are seeing riots, fears about a deadly second wave of COVID-19, and even political advertising on social media being dragged back into the limelight. Is this the time to be bullish on businesses returning to heavy pre-COVID advertising numbers?
Why Do I Think A Hold?
If I looked at Trade Desk a few weeks ago I like to think I would have had a different view, but right now this is an extremely overbought and expensive stock, that is already brushing against its peak.
I would not be as pessimistic as to call this a sell, the company has almost no debt and has done an excellent job of controlling its contracts to provide a steady and reliable income. If you are invested there is no harm in ridding this out while the company carries on its growth.
As a new potential investor, I’ve missed the boat and don’t like to look of the ocean right now. Advertising will open back up when companies want to promote their social messages but the spend and volume will be way below what we have seen in the past. We are facing more and more reasons for businesses to delay and play carefully in the US, while Trade Desk might be a winner in their space that doesn’t mean they have an easy ride for the next six months.
It’s worth keeping an eye on them to see if the price cheapens, but I would worry they could be losing their competitive edge without endless investment into their data abilities. With no dividend and a negative targeted share price, there isn’t anything which is indicating a meaningful payoff for me as a shareholder. For now, I’ll keep my money for a different opportunity.
Let me know what you think of the analysis, anything I missed or you would want more detail on? I’ve been having a great time looking at these different stocks, and I always love to hear your thoughts.
Thanks for reading and stay safe!