After being out of TTD (Trade Desk) for over 5 years, I re-established a position at $38.32 at around 3.7% of my portfolio.
TTD has been historically pretty expensive as they had been delivering very strong growth but its stock has been crushed to levels similar to when I exited in mid-2020 and the stock is now valued at 21X CY EPS estimates for the year that ends tomorrow and 18X NY estimates which are for growth of 17% which I think is fairly attractive. The digital advertising industry has been evolving rapidly and some peers have also been crushed as their earnings have been crushed or results have been erratic while another peer, APP, has delivered outstanding growth and is now valued at a significant premium. Fears of encroachment from Amazon, Google, and Facebook are partly due to TTD’s collapsed multiple and the reshaping of the industry and how adspend has been allocated (open internet vs walled gardens and different participants) is also responsible for slowed growth and contributing to a lower multiple. Despite the reshaping of the industry in recent years, I still think TTD provides a solid value proposition to its clients as it remains intensely focused on providing value in the open internet “where price discovery and competition exist” according to management. It’s possible spending keeps shifting to walled gardens and APP or that ad budgets shrink in a weak economy and all of these risks have been present over the past number of years and it’s possible the stock can get cheaper but I think continued solid results should drive solid returns for patient investors.
One important note is that some people think TTD is more expensive as they look at GAAP EPS instead of non-GAAP EPS due to large stock-based compensation expense. I agree 100% that there is a cost to stock compensation and it’s important to appreciate the true cost of stock-based compensation (the economic cost) rather than the accounting expense. For example, stock comp expense has accounted for 40-60% of non-GAAP EBT over the past couple of years although the actual grant activity has resulted in very low sing-digit dilution. Two reasons for such a large expense are past grants at a much higher valuation which get amortized over a few years coupled with a large 1-time management grant a few years ago (unless they do another bulk grant) which was also at a much higher valuation. But ultimately if grant activity has resulted in low single digit dilution per year, large accounting expenses are more accounting than economic and non-GAAP EPS is much closer to its economic earnings than GAAP EPS.