The Trade Desk: Look Before You Leap - High Valuation Alert

Investors in The Trade Desk, Inc. (NASDAQ:TTD) celebrated a remarkable market-beating performance in 2023 as TTD surged to its early August highs. However, sellers denied further upside at the $92 level before a post-earnings selloff followed as TTD bottomed out in mid-August at the $70 level. As such, TTD briefly entered a bear market, which caused buyers to return aggressively, lifting its recent recovery over the past three weeks.

The Trade Desk posted a remarkable second-quarter or FQ2 earnings release. It demonstrates the secular tailwinds from Connected TV or CTV while leveraging the growth drivers in retail media ads. The company also stressed that it grew faster than the overall digital ad industry in Q2, corroborating market share gains in the industry.

CEO Jeff Green and his team have delivered spectacular performances over the past year despite the cyclical downturn that affected the industry. Notably, The Trade Desk delivered revenue growth of more than 20% over the past three quarters, benefiting from its well-diversified portfolio of customers. CTV remains a key growth driver for The Trade Desk and will likely continue to underpin its forward projections.

Furthermore, the challenges engulfing the Linear TV industry could provide a stronger impetus for streaming companies to expand their CTV advertising efforts. As such, TTD's share gains continued powering through the recent dispute between Disney (DIS) and Charter (CHTR), which could have ramifications on the near-term prospects of Linear TV amid the ongoing strikes.

Despite the market optimism, caution must still be emphasized, given TTD's implied growth premium. Accordingly, TTD last traded at a forward EBITDA multiple of nearly 48x as it surged, and a forward free cash flow or FCF yield of 1.6%.

As such, the market has priced in significant optimism against its valuation, even though the company is expected to continue generating solid profitability growth. Analysts' estimates suggest that The Trade Desk is expected to post an adjusted EBITDA CAGR of more than 22% from FY22-25. It's also reflected in the "A-" growth and profitability grades assigned by Seeking Alpha's Quant, reflecting its robust business model.

I assessed that the leading independent demand-side platform, or DSP, is well-positioned to navigate the continued growth in the digital ad industry as retailers seek to monetize their first-party data. Furthermore, its exposure to CTV growth should also underpin robust buying sentiment about the company's prospects.

While I don't anticipate red flags on its price action suggesting sell signals, buying its steep growth premium could impact the risk/reward performance investors experience, as seen in TTD's recent steep volatility.

TTD formed its lows in August as it briefly entered a bear market after collapsing from its early August highs. However, it has recovered remarkably as it inches closer to re-testing those highs.

TTD's price action has yet to demonstrate a sell signal for investors to consider cutting exposure, in my opinion. Furthermore, the robust recovery of its uptrend bias corroborates my observation that buying sentiment remains constructive.

That said, new investors who missed adding its recent bottom should consider waiting patiently for the next steep pullback before adding, given its high valuation and recent surge.

Rating: Maintain Hold. Please note that a Hold rating is equivalent to a Neutral or Market Perform rating.

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

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