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The Trade Desk (NASDAQ:TTD) Beats Q1 Sales Targets But Stock Drops


Full Report / May 10, 2022
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Advertising software maker The Trade Desk (NASDAQ:TTD) beat analyst expectations in Q1 FY2022 quarter, with revenue up 43.4% year on year to $315.3 million. However, guidance for the next quarter was less impressive, coming in at $364 million at the midpoint, being 0.19% below analyst estimates. The Trade Desk made a GAAP loss of $14.5 million, down on its profit of $22.6 million, in the same quarter last year.

The Trade Desk (TTD) Q1 FY2022 Highlights:

  • Revenue: $315.3 million vs analyst estimates of $304.2 million (3.63% beat)
  • EPS (non-GAAP): $0.21 vs analyst estimates of $0.14 (44.9% beat)
  • Revenue guidance for Q2 2022 is $364 million at the midpoint, being 0.19% below analyst estimates
  • Free cash flow of $136.1 million, roughly flat from previous quarter
  • Gross Margin (GAAP): 79.7%, up from 77% same quarter last year

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.

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 be more cost-efficient.

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 money from them. Instead it charges its customers subscription fee for using its product that is based on a percentage of the overall ad spend.

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

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).

Sales Growth

As you can see below, The Trade Desk's revenue growth has been exceptional over the last year, growing from quarterly revenue of $219.8 million, to $315.3 million.

The Trade Desk Total Revenue

And unsurprisingly, this was another great quarter for The Trade Desk with revenue up 43.4% year on year. But the revenue actually decreased by $80.2 million in Q1, compared to $94.5 million increase in Q4 2021. However, The Trade Desk's sales do seem to have a seasonal pattern to them, and since management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.

Guidance for the next quarter indicates The Trade Desk is expecting revenue to grow 30% year on year to $364 million, slowing down from the 100% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 28.7% over the next twelve months.

Profitability

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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 79.7% in Q1.

The Trade Desk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, this is still a good gross margin that allows companies like The Trade Desk to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. The Trade Desk's free cash flow came in at $136.1 million in Q1, up 123% year on year.

The Trade Desk Free Cash Flow

The Trade Desk has generated $396.4 million in free cash flow over the last twelve months, an impressive 30.6% of revenues. This robust FCF margin is a result of The Trade Desk asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from The Trade Desk's Q1 Results

Sporting a market capitalization of $21.8 billion, more than $1.1 billion in cash and with positive free cash flow over the last twelve months, we're confident that The Trade Desk has the resources it needs to pursue a high growth business strategy.

We were impressed by the exceptional revenue growth The Trade Desk delivered this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was less good to see the  deterioration in gross margin and the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But investors might have been expecting more and the company is down 6.26% on the results and currently trades at $41 per share.

Is Now The Time?

When considering The Trade Desk, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are numerous reasons why we think The Trade Desk is one of the best software as service companies out there. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its impressive gross margins are indicative of excellent business economics.

The Trade Desk's price to sales ratio based on the next twelve months is 12.7x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. Looking at the tech landscape today, The Trade Desk's qualities as a business really stand out and we still like it at this price.

The Wall St analysts covering the company had a one year price target of $95.1 per share right before these results, implying that they saw upside in buying The Trade Desk even in the short term.

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