The Trade Desk: Remarkable Surge That I Didn't Anticipate

I must admit that I have been astounded by the stunning performance of The Trade Desk, Inc. (NASDAQ:TTD) stock over the past six months since my previous update. TTD has outperformed its communication sector (XLC) peers and the S&P 500 (SPX) (SPY) significantly since forming its bottom in early January 2023.

As such, TTD has not looked back after its stunning collapse to form its long-term lows from May to July 2022. Moreover, CEO Jeff Green and his team have continued to prove doubters wrong, with another remarkable Q1 earnings release in May. While the ad and media industry players have stuttered with macroeconomic uncertainties, The Trade Desk's leadership in the programmatic ad space has coped remarkably well.

Keen investors should have gleaned helpful commentary from management in May, highlighting its diversified revenue exposure across several verticals. The company stressed that "travel spend nearly tripled in Q1" while performing well in other areas such as "food and drink, automotive, and home and garden." Therefore, it helped to mitigate weaknesses in the shopping and business verticals, which underperformed.

As such, The Trade Desk's ability to post revenue growth of 21.4% in Q1 and guided for about 20% growth in Q2 was impressive. It demonstrated the company's clear leadership in the CTV programmatic space and its ability to capitalize on the nascent retail media space. The company also highlighted that it "presents an incremental market opportunity," suggesting another potentially lucrative growth area.

Moreover, with the US economy coping relatively well so far, dip buyers early this year likely assessed that The Trade Desk could manage better than its peers, allowing it to gain more share. New CFO Laura Schenkein accentuated that the company's "disciplined" approach has paid off, allowing The Trade Desk to continue investing while its "peers are pulling back." As such, the company intends to leverage its momentum to "stay the course and grab [more] share."

I am certain that my downgrade on TTD to Hold in January was way too early, as I underestimated the competitiveness of the company's platform. I was too careful about whether The Trade Desk could survive potentially weaker macroeconomic conditions in 2023 while trading at a much higher valuation than its peers.

Notwithstanding, that doesn't necessarily mean that investors who missed its January lows should jump on board now, as its valuation has surged further and seems even more pricey.

At a forward EBITDA multiple of 47x, it's way ahead of its media peers with a median EBITDA multiple of just 6.3x. In addition, Seeking Alpha Quant rated TTD with the worst possible valuation grade of "F," suggesting that investors should exercise caution.

Despite that, I did not observe a sell signal on TTD suggesting long-term investors consider taking profits/cutting exposure at the current levels. While the remarkable recovery from its January lows has weakened recently, TTD's momentum could continue, as it valuation remains well below its overvalued zones in late 2020.

In addition, the company is expected to continue gaining operating leverage through 2025. As such, based on its FY25 EBITDA multiple of 29.5x, the market might not have fully reflected its potential growth, discounting execution risks from macroeconomic uncertainties.

As such, I view TTD's recovery favorably and believe that investors can consider capitalizing on its next pullback, as it has resumed its uptrend bias decisively.

Rating: Hold (on the watch for a revision).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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