Shares of Trade Desk (NASDAQ: TTD ) rocketed higher in mid-February after the programmatic advertising leader reported a double-beat-and-raise fourth-quarter earnings report, which underscored the persistent strength of this company's secular growth narrative. In response to that report, TTD stock rallied more than 30% to fresh all-time highs.
But, that rally is just the latest step up in what has been a multi-year rally for TTD stock. Two years ago, TTD was a $30 stock. Now, shares are trading hands around $200. Thus, the stock has risen by nearly seven-fold over the past 24 months.
Some observers think this rally is over. Indeed, TTD stock has given back some gains ever since its huge post-earnings rally. But, recent weakness is on light volume, and is most likely just edge-case profit-taking. Most investors are holding onto their shares, and with good reason.
In the big picture, Trade Desk is one of the best growth narratives in the stock market, and projects to remain so over the next several years. The company is pioneering a new era of programmatic advertising, and is still relatively small considering the enormous $1 trillion advertising market that they are attacking. Plus, margins are high, competition is muted, growth is accelerating, and the balance sheet is clean.
Overall, Trade Desk stock is a long-term winner. At $200, valuation is somewhat of a concern. But, not enough of a concern to offset a robust secular growth narrative, and knock this stock off course. Thus, prices above $200 make sense for Trade Desk stock in 2019, and sticking with the stock through this rally makes sense for long-term investors.
Strong Q4 Numbers Underscore Strong Long-Term Outlook
The Trade Desk's fourth earnings quarter report was stellar across the board. Revenues topped expectations, and revenue growth accelerated both sequentially and year-over-year. Earnings topped expectations, too, and margins improved both sequentially and year-over-year. For the full-year, gross ad spend growth remained north of 50% and didn't slow relative to 2017, while revenue growth actually improved from 52% to 55%. Profit margins also rose more than 200 basis points year-over-year. The guide was good, too, and implied continued top-line strength next quarter and throughout 2019.
Overall, the quarter was really good, and underscored that this company remains on a long-term winning trajectory.
In the big picture, Trade Desk is pioneering a new era of programmatic advertising, wherein machines are used to buy ads based on analytics, big data and algorithms. Over the past several years, as analytic methods and algorithms have improved, and as the volume of big data globally has surged higher, automated ad buying and selling has become more efficient than traditional ad buying and selling. As this has happened, the programmatic advertising market has boomed, and TTD stock has soared.
This rally is just getting started. For all intents and purposes, programmatic advertising is still in the early stages of its hyper-growth narrative. Over the next several years, advertisers will increasingly use data and algorithms to manage, analyze and optimize ad spend across all ad channels, from web to mobile to TV to audio. As this transition plays out, Trade Desk will become a much bigger part of the global advertising model. As this happens, TTD stock will soar higher.
Strong Q4 numbers underscore that The Trade Desk remains on this winning growth trajectory. So long as this remains true, TTD stock will continue to march higher in a long-term window.
Prices Above $200 Make Sense
Many pundits think that the best of the TTD stock rally is in the rear-view mirror. But, that claim misunderstands one very important fact: The Trade Desk is still relatively tiny compared to its global opportunity.
Consider this: the global digital advertising market measured just over $230 billion last year. The total global advertising market is marching toward $1 trillion. Eventually, at scale, the global advertising market will exceed $1 trillion. All of those ads, whether they are through the web, connected TV, audio or through any other medium, can be transacted programmatically. Eventually, all of them will be, given that machines will ultimately be better than humans at allocating ad spend.
Thus, TTD is attacking a market that will one day measure $1 trillion. Gross ad spend on the platform last year was just $2.35 billion. That figure grew by more than 50% year-over-year. In other words, Trade Desk is at less than 0.5% penetration and growing at a 50%-plus rate. The implication? This big growth narrative is just getting started.
By 2025, I think TTD can grow its gross ad spend from $2.35 billion to $15 billion. Revenues should consequently march from under $500 million, to $3 billion during that stretch. Margins will trend higher, too, as aggressive growth-related investments peel back and are offset by revenue scale. Putting that all together, I think TTD can do about $15 in earnings-per-share by fiscal 2025.
At that point in time, the TTD growth narrative will still be far from over. Thus, Trade Desk stock will easily warrant a big growth 25 forward multiple. Based on a 25 forward multiple, a reasonable 2024 price target for Trade Desk stock is $375. Discounted back by 10% per year, that equates to a fiscal 2019 price target of over $230.
Bottom Line on TTD Stock
Right now, TTD is firing on all cylinders, and they will continue to do so for the foreseeable future given secular growth tailwinds in the programmatic advertising market. As such, TTD stock will remain on a long-term winning trajectory, regardless of near-term volatility.
As of this writing, Luke Lango was long TTD.
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