Trade Desk (NASDAQ:TTD) Posts Better-Than-Expected Sales In Q1, But Stock Tanks 25%

Adam Hejl /
2021/05/10 4:06 pm EDT

Advertising software maker The Trade Desk (NASDAQ:TTD) reported Q1 FY2021 results beating Wall St's expectations, with revenue up 36.8% year on year to $219.8 million.

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Trade Desk (NASDAQ:TTD) Q1 FY2021 Highlights:

  • Revenue: $219.8 million vs analyst estimates of $217.2 million (1.2% beat)
  • EPS (non-GAAP): $1.41 vs analyst estimates of $0.81 (75.1% beat)
  • Revenue guidance for Q2 2021 is $260.5 million at the midpoint, above analyst estimates of $251.5 million
  • Gross Margin (GAAP): 77%, down from 83.8% previous quarter
  • Stock split: Ten-for-one split of The Trade Desk’s common stock in the form of a stock dividend

“We delivered outstanding performance in the first quarter, once again surpassing our expectations. Revenue growth acceleration over Q1 a year ago is testament to the value that marketers are placing on data-driven advertising. Nowhere is this more apparent than CTV, which continues to lead our growth,” said Jeff Green, Co-founder and CEO of The Trade Desk.

Independent Platform For Online Ad-buyers

Founded in 2009, The Trade Desk (NASDAQ:TTD) offers cloud-based software that uses data to help advertisers better plan, place and target their online ads. Digital advertising is a massive industry and while large platforms like Google and Facebook provide tools for buyers of ads, it is still in their interest to sell as many ads for as much money as possible. The Trade Desk is providing online marketing agencies with an independent platform that helps them optimize ad-campaigns to run cost-efficiently.

The platform integrates the data advertisers have about their potential customers with all the other data Trade Desk has available, and automatically makes suggestions about who is the highest-value audience, when to reach them and how. Once the campaign is running, Trade Desk scans millions of available ad slots in real-time and automatically makes bids for placements when they are likely to yield the results the advertiser is looking for. Interestingly, to keep its incentives aligned with its customers, Trade Desk is selling the ad slots at cost and not making any from money them. Instead it chargers its customers subscription fee for using its product that is based on a percentage of the overall ad spend.

Market Environment and Competitors

The digital advertising market is massive, growing and becoming more diverse, both in terms of audiences and media. This as a result drives a growing need to automate and optimize ad placements, which Trade Desk is well positioned to benefit from. The Trade Desk is mainly competing with tools for ad buyers provided by ad sellers like Google (NASDAQ:GOOGL) or Facebook (NASDAQ:FB) and divisions of companies like AT&T (NYSE:T) and Adobe (NASDAQ:ADBE).

As you can see below, Trade Desk's revenue growth has been strong over the last twelve months, growing from $160.6 million to $219.8 million.

Trade Desk Total Revenue

And unsurprisingly, this was another great quarter for Trade Desk with revenue up an absolutely stunning 36.8% year on year. But the growth did slow down compared to last quarter, as the revenue increased only by about $50 million in Q1, compared to $103.7 million in Q4 2020. A one-off fluctuation is usually not concerning and Trade Desk seems to be a seasonal business, but it is worth keeping in mind.

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. Trade Desk has a more volatile revenue compared to other SaaS businesses as customers are paying a percentage of their ad spend rather than a fixed fee, and that volatility can also impact margins.

Trade Desk Gross Margin (GAAP)

Trade Desk's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 77% in Q1. That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop this is still, this is still a good gross margin that will allow Trade Desk to fund large investments in product and sales during periods of rapid growth and be profitable when it reaches maturity.

Key Takeaways from Trade Desk's Q1 Results

With market capitalisation of $31.4 billion and more than $680 million in cash, the company has the capacity to continue to prioritise growth.

We enjoyed the positive outlook Trade Desk provided for the next quarter’s revenue. And we were also excited to see the really strong revenue growth. On the other hand, the market was probably expecting even higher sales considering the strong Q4 and it was disappointing to see the deterioration in gross margin. Overall, this quarter's results still seemed pretty positive to us. While the market has high expectations of Trade Desk, its track record makes it look like a good growth stock, and after these results it still deserves a spot on your watchlist if you like software as a service growth stories, especially considering the price drop.

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