The Trade Desk (NASDAQ:TTD) Q3 Sales Beat Estimates But Stock Drops 26.3%

Radek Strnad /
2023/11/09 4:10 pm EST

Advertising software maker The Trade Desk (NASDAQ:TTD) reported Q3 FY2023 results beating Wall Street analysts' expectations, with revenue up 24.9% year on year to $493.3 million. On the other hand, next quarter's revenue guidance of $580 million was less impressive, coming in 5.1% below analysts' estimates. Turning to EPS, The Trade Desk made a non-GAAP profit of $0.33 per share, improving from its profit of $0.26 per share in the same quarter last year.

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The Trade Desk (TTD) Q3 FY2023 Highlights:

  • Revenue: $493.3 million vs analyst estimates of $487.2 million (1.2% beat)
  • EPS (non-GAAP): $0.33 vs analyst estimates of $0.29 (13.6% beat)
  • Revenue Guidance for Q4 2023 is $580 million at the midpoint, below analyst estimates of $611.1 million (Adjusted EBITDA guidance of $270 million also missed expectations of roughly $29 million for next quarter)
  • Free Cash Flow of $183.8 million, up 52.3% from the previous quarter
  • Gross Margin (GAAP): 81.1%, down from 82.2% in the same quarter last year

“Q3 was a strong quarter for The Trade Desk as we delivered revenue of $493 million, accelerating growth to 25%. This performance underlines the premium that advertisers are placing on precision, agility and transparency as they seek to maximize returns from their campaigns,” said Jeff Green, Co-founder and CEO of The Trade Desk.

Founded by former Microsoft engineers Jeff Green and Dave Pickles, The Trade Desk (NASDAQ:TTD) offers cloud-based software that uses data to help advertisers better plan, place, and target their online ads.

Advertising Software

The digital advertising market is large, growing, and becoming more diverse, both in terms of audiences and media. As a result, there is a growing need for software that enables advertisers to use data to automate and optimize ad placements.

Sales Growth

As you can see below, The Trade Desk's revenue growth has been strong over the last two years, growing from $301.1 million in Q3 FY2021 to $493.3 million this quarter.

The Trade Desk Total Revenue

This quarter, The Trade Desk's quarterly revenue was once again up a very solid 24.9% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $29.01 million in Q3 compared to $81.45 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that The Trade Desk is expecting revenue to grow 18.2% year on year to $580 million, slowing down from the 24% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 24% over the next 12 months before the earnings results announcement.

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What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. The Trade Desk's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 81.1% in Q3.

The Trade Desk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, sales and marketing, and general administrative overhead. The Trade Desk's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that The Trade Desk is controlling its costs and not under pressure from its competitors to lower prices.

Key Takeaways from The Trade Desk's Q3 Results

Sporting a market capitalization of $38.65 billion, more than $1.52 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that The Trade Desk is attractively positioned to invest in growth.

It was encouraging to see The Trade Desk narrowly top analysts' revenue expectations this quarter. On the other hand, its revenue and adjusted EBITDA guidance for next quarter underwhelmed. The markets have been skittish about the macro, and The Trade Desk is a company heavily tied to macro-sensitive advertising, so the weak outlook may cause alarm. While it was objectively a mixed quarter for The Trade Desk since results were fine but guidance was weak, the market seems spooked about the future. The company is down 26.3% on the results and currently trades at $56.69 per share.

The Trade Desk may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.