To The Moon

$Trade Desk Inc.(TTD)$

Stock Performance and Recent Decline

Since I first invested in The Trade Desk, its stock has risen over 10 times, but the journey has been anything but smooth. As you can see over the past three years, it’s been quite a roller coaster—actually, the stock is down over that period. If you zoom in more recently, you'll notice that year-to-date, the stock has lost more than 50% of its value. So, does this mean The Trade Desk is suddenly on the verge of going out of business, or what’s going on with the company that could cause such a sharp decline in value? Typically, a loss of this magnitude in such a short period raises some red flags. Let’s dive in and figure out what’s happening with The Trade Desk.

My Experience with The Trade Desk

Fortunately, as I’ll explain in this article, my experience with the stock has been positive overall. Although it used to be a much larger portion of my portfolio, it’s now less than 1% due to some of the dynamics we’ll discuss, mainly revolving around valuation. Towards the end of the video, I’ll give my thoughts on where the stock might be headed.

What The Trade Desk Does

What does The Trade Desk do? They operate a platform for ad buyers, which might sound confusing at first. Essentially, advertisers with large ad budgets hire agencies to help craft their marketing messages. However, these agencies often lack the technical knowledge to interact with all the complex components in the advertising ecosystem, such as ad exchanges, supply networks, and publishers with available ad space. This is where The Trade Desk’s demand-side platform comes in, enabling advertisers and agencies to purchase ad inventory intelligently and in real-time.

The Stock Exchange Analogy

The best way to understand this is by thinking of it like a stock exchange. Decades ago, trading involved shouting bids and offers, but now it's all done electronically via computers. Advertising has evolved in a similar way, with The Trade Desk using algorithms to bid on the best opportunities for ad spending. The opportunity here is huge—estimated at over a trillion dollars. The Trade Desk handles roughly $122 billion in spend, meaning there’s a lot of room for growth.

Why I Invested in The Trade Desk

One of the reasons I initially bought the stock and still hold a small position is because of their consistent market share gains, growing at a rate of 20%+ per year. When a company is growing faster than the overall market, it signals that they’re doing something special. This growth has remained steady even during challenging times, like the COVID-19 pandemic. Over the years, The Trade Desk has consistently increased its revenue, and another attractive feature is that they’ve been profitable since 2013. Although they’ve reinvested profits in recent years, the company’s profitability from the start is a key factor I liked.

Concerns About Competitors

A common concern I hear is whether giants like Google, Meta, or Amazon might eventually take over this demand-side business. I’d argue that while those companies might try, there’s a niche for The Trade Desk. They don’t have their own inventory to sell like Google or Amazon, meaning they’re not conflicted. Their focus is entirely on finding the best deals for advertisers, with no competing interests.

Leadership and Management

Another reason I was drawn to The Trade Desk is because of Jeff Green, the founder and CEO. He has a proven track record, having successfully sold a previous company. When a founder runs a business not out of necessity, but out of passion, it shows they’re committed to creating value for shareholders. This type of leadership tends to result in better outcomes, in my opinion. Green’s passion for the company and its mission gives me confidence in its future.

Free Cash Flow and Market Opportunity

The Trade Desk is generating significant free cash flow, with approximately $700 million in free cash flow. They also see a huge market opportunity, particularly in the rapidly growing connected TV submarket. In addition, international growth prospects remain promising. One of their greatest strengths is their objectivity, which aligns them with brands and agencies, allowing them to provide unbiased ad-buying strategies. They believe this combination of factors makes The Trade Desk a great company and an excellent investment, especially as they continue to promote the open internet over walled gardens like Facebook.

Why the Stock Price is Falling

Despite these positive aspects, why is The Trade Desk's stock price collapsing? I believe this can be tied to Charlie Munger’s investment philosophy. Munger once compared investing to betting on horses, where you look for a horse with a one-in-two chance of winning that pays three-to-one. Essentially, you’re looking for mispriced opportunities. The challenge here is that everyone knows The Trade Desk is a great company, so the odds become less attractive. If everyone is betting on the same stock and it’s considered a "sure thing," the valuation becomes stretched, which makes it harder for the stock to grow. The Trade Desk’s stock may go nowhere for years if the valuation is too high. In this case, the stock's 50% drop this year reflects the correction of its overly high valuation. When you’re paying 40 times sales for a company, it becomes increasingly difficult to make a profit, even if the company continues to grow. Investors need to remember to think about the base rate—how do similar investments typically play out?

Valuation Concerns When I originally bought The Trade Desk shares, it was at a much lower valuation—around five or six times sales. Back then, the growth rate was much higher, and the investment thesis was more compelling. Now, the growth is harder to maintain as the company scales, but the trillion-dollar market opportunity still offers plenty of room for growth. However, the company’s valuation is likely closer to reasonable levels now after previously reaching absurd heights. It’s important for investors to reflect on this and remember that a high valuation presents a tougher challenge, even if the long-term opportunity is still strong.

Outlook for 2025

One factor that may have disappointed investors is The Trade Desk’s outlook for this year. Their growth forecast for Q1 came in softer than expected, with a forecast of just 17% growth, indicating a continued deceleration in growth. Additionally, they are anticipating a modest increase in expenses, which could lead to a slight decrease in profit margins. Investors typically don’t like to hear about lower margins and decelerating growth. They prefer to hear about margin expansion and accelerating growth.

Investment Thoughts on The Trade Desk

I want to clarify that this is not financial advice. As I mentioned, I own a small position in The Trade Desk and am considering adding more. Full disclosure, I recently received positive feedback from a premium member of the Unrivaled Investing community, who praised the value of the service. If you’re interested in compelling investment ideas, I recommend checking out Unrivaled Investing. Note that the annual premium subscription will be increasing later this year, so it’s a good time to lock in the current rate.

Macro Perspective: Potential Recession

Zooming out a bit, it's important to consider the macroeconomic environment. The Federal Reserve’s Atlanta branch is forecasting a recession, with economic contraction expected in Q1. This could be tied to various factors, including tariffs and shifts in import/export dynamics. Additionally, a reduction in the fiscal deficit could create significant problems for the economy, potentially triggering a recession. While macro forecasts can be difficult to predict accurately, it’s always worth being aware of the broader economic picture. If a contraction is indeed on the horizon, it could impact The Trade Desk’s performance.

Industry Dynamics and Evolution

The Trade Desk operates in a dynamic and evolving industry. Unlike a product like Snickers, which hasn’t changed much in the past 50 years, The Trade Desk is part of a fast-changing ad tech ecosystem. One of the key aspects of their evolution is their AI-powered architecture, which is being rolled out, though at a slower pace than originally anticipated. Additionally, they recently acquired Sincero, a data analytics company. This highlights the fact that when you invest in The Trade Desk, you’re betting on the company’s ability to adapt and continue growing in an evolving landscape. While I’m not seeing any immediate signs of disruption, it's important to recognize that the company’s future will look different in five to ten years.

Evaluating the Risks and Rewards

As with any investment, it’s important to evaluate the potential risks and rewards. The management at The Trade Desk is aligned with shareholders, with Jeff Green, the founder, heavily involved in the company’s direction. However, while the company has great growth potential and a large market opportunity, the valuation is still a key factor to consider. If you’re paying a high price for a stock, the risk of underperformance increases. The risks associated with a dynamic, evolving industry also mean that there should be a risk premium—lower valuations to account for the uncertainty. However, despite these risks, there is still a significant opportunity for growth in the connected TV space and beyond.

Customer Concentration and Risks

One of The Trade Desk's key customers is Publicis, an ad agency group representing about 14% of their billings in 2024. The top three customers account for over 40% of their receivables. It’s important to note that these ad agencies often own multiple marketing agencies, meaning it’s not just one company directing that 14% of spending. It’s possible that several smaller agencies under this umbrella could drive this usage of The Trade Desk's technology. While this model benefits The Trade Desk by offering wide exposure, it also creates a risk. If there were a top-down decision that the Trade Desk couldn’t be used, it could cause significant issues for the company, including potential margin compression. Overall, I see this as a win-win, as ad spend gets a better return on investment, but this concentration still warrants caution.

Evaluating the Investment Opportunity

The Trade Desk’s current stock price is around $53 per share, which is down about 60% in recent months. Although this suggests the stock may be oversold, I wouldn’t classify it as deeply cheap either. The company is exceptional, but we need to assess the risk-reward ratio, as Charlie Munger would advise. When looking at this as an investment, we must ask if the odds are favorable for a great payout. Assuming a 20% annual growth rate and a 30-times multiple in five years, the potential upside is roughly 100%. However, it’s important to note that this is a hypothetical scenario—stock prices can fluctuate. If growth continues at 20% and profit margins expand from where they are now, this could result in a decent return, but the upside still isn’t as compelling as some might hope. For a truly attractive investment, I typically look for opportunities where the low-case scenario still offers a meaningful upside, and here, even with growth, the upside is more modest.

Considering Low-Case Scenarios

If The Trade Desk were to grow at only 15% over the next five years, that would still be a possible scenario given their current outlook of 17% growth for Q1. While that would be somewhat disappointing, it wouldn't necessarily be a worst-case scenario. With a 20-times earnings multiple, the stock could still remain relatively flat or even underperform, particularly if their profit margins experience some contraction. In that case, the stock might not offer significant gains in the short term.

Macro Considerations and Historical Context

There’s also a macroeconomic element to consider. Historical recessions, such as the 1974 recession, led to significant contractions in valuation multiples for ad businesses like The Trade Desk. During those times, companies that were once considered high-growth with high margins saw their valuations fall drastically. While I’m not predicting a similar outcome, it’s worth noting that the broader economic environment could lead to lower multiples for this industry, which might impact The Trade Desk’s stock performance.

Conclusion

From my perspective, there are other opportunities that feel more compelling right now, which I’ve been investing in. I’m not all-in on The Trade Desk, but I would be open to owning more if the price becomes more attractive. It wouldn’t surprise me if the stock bounces from here, especially given how oversold it’s been. However, the reset from the idea of "this is the greatest horse ever" to "what’s the more reasonable risk-reward ratio" is happening now. As more valuation-minded investors come into play, we’re seeing a reset of expectations and a more sensible approach to valuing the company.

The Trade Desk has solid growth potential in an evolving industry, but investors must be mindful of the risks involved, especially given the current valuation. While the company has been very successful, future performance will depend on its ability to adapt to industry changes and continue capturing market share.In summary, despite some recent challenges, The Trade Desk continues to execute well, growing at a solid pace, and I believe it has significant potential in the years ahead.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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