Down over 40% this year, is Trade Desk stock a buy?

It was a difficult year for the stock market as a whole, but even more difficult for many growth stocks. Shares of The trading post (TTD -0.28%), a provider of a data-driven digital ad buying platform, were among the stocks that took a heavy hit. Year-to-date, stocks are down about 45% at the time of this writing.

Just because a stock is down sharply doesn’t automatically make it a buy. Many growth stocks arguably deserved their beatings, especially those that aren’t yet profitable. After all, higher interest rates mean the cost of capital is higher, and lower stock prices mean it’s much harder to raise equity. Many growth stocks are therefore likely to trade significantly lower than they were earlier this year.

But this macro environment also highlights how companies that are able to fund business growth through operating cash flow today have significant advantages over their unprofitable counterparts. The Trade Desk’s finances are extremely sound, making it one of those advantaged companies. Not only does it generate substantial free cash flow, but it also has no debt. This, combined with the company’s strong market leadership, makes its stock attractive at this level.

Strong finances

The Trade Desk is a cash cow. Of its approximately $388 million in revenue over the last 12 months, $108 million (or 28%) was converted into free cash flow – the hard cash left over after taking over regular business operations and capital expenditure.

As for the company’s balance sheet, The Trade Desk has approximately $1.2 billion in cash, cash equivalents and short-term investments. As The Trade Desk’s Chief Financial Officer Blake Grayson said during the company’s second quarter earnings call, “[T]The strength of our business model and our balance sheet has positioned us well.” Indeed, just as many other companies are slowing the pace of their investments, The Trade Desk is able to accelerate the pace of their investments and “focus on the long term growth of the business,” Grayson explained.

An underestimated competitive advantage

While financial strength works in favor of The Trade Desk in this market, another important driver for the ad-tech company is its competitive structural positioning. First, The Trade Desk is one of the few large-scale ad buying platforms capable of remaining independent and objective on behalf of its clients. Not only does The Trade Desk own none of its own content, but it also only serves ad buyers, not publishers. This means advertising agencies can be confident that The Trade Desk’s incentives are aligned with their goals.

Additionally, The Trade Desk’s independent and objective platform has such reach across advertising verticals, geographies and audiences that it is becoming increasingly indispensable to ad agencies. This is especially evident by the company’s strong revenue growth recently.

Trade Desk revenue in the second quarter increased 35% year over year. This happened as the dominant players in digital advertising Alphabet and Metaplatforms saw their advertising revenue increase by 11.6% and decrease by 1.5%, respectively. The Trade Desk argues in its earnings appeals that its market share gains are, in part, due to its platform becoming the “default” demand-side platform for the open internet and the connected television.

All this indicates that it may be a good idea to buy the decline in shares of The Trade Desk.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Daniel Sparks has no position in the stocks mentioned. Its clients may hold shares of the companies mentioned. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc. and The Trade Desk. The Motley Fool has a disclosure policy.

Comments are closed.