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The Trade Desk (NASDAQ:TTD) Beats Expectations in Strong Q4, Stock Jumps 22.4%


Full Report / February 15, 2024

Advertising software maker The Trade Desk (NASDAQ:TTD) announced better-than-expected results in Q4 FY2023, with revenue up 23.4% year on year to $605.8 million. On top of that, next quarter's revenue guidance ($478 million at the midpoint) was surprisingly good and 5.7% above what analysts were expecting. It made a non-GAAP profit of $0.41 per share, improving from its profit of $0.38 per share in the same quarter last year.

The Trade Desk (TTD) Q4 FY2023 Highlights:

  • Revenue: $605.8 million vs analyst estimates of $582.2 million (4% beat)
  • EPS (non-GAAP): $0.41 vs analyst expectations of $0.43 (4.6% miss)
  • Revenue Guidance for Q1 2024 is $478 million at the midpoint, above analyst estimates of $452.3 million
  • Adjusted EBITDA¬†Guidance for Q1 2024 is $130 million at the midpoint, well above analyst estimates of $113 million
  • Free Cash Flow of $63.79 million, down 65.3% from the previous quarter
  • Gross Margin (GAAP): 83.4%, in line with the same quarter last year
  • Market Capitalization: $36.43 billion

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 The 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, The 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, The Trade Desk is selling the ad slots at cost and not making any money from them. Instead it charges its customers a subscription fee for using its product that is based on a percentage of the overall ad spend.

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.

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 strong over the last two years, growing from $395.6 million in Q4 FY2021 to $605.8 million this quarter.

The Trade Desk Total Revenue

This quarter, The Trade Desk's quarterly revenue was once again up a very solid 23.4% year on year. On top of that, its revenue increased $112.5 million quarter on quarter, a very strong improvement from the $29.01 million increase in Q3 2023. This is a sign of acceleration of growth and great to see.

Next quarter's guidance suggests that The Trade Desk is expecting revenue to grow 24.9% year on year to $478 million, improving on the 21.4% year-on-year increase it recorded in the same quarter last year.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 83.4% in Q4.

The Trade Desk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, 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.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. The Trade Desk's free cash flow came in at $63.79 million in Q4, down 48.1% year on year.

The Trade Desk Free Cash Flow

The Trade Desk has generated $543.3 million in free cash flow over the last 12 months, an eye-popping 27.9% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from The Trade Desk's Q4 Results

We were impressed by The Trade Desk's revenue guidance and rosy outlook for next quarter, which blew past analysts' expectations for both revenue and adjusted EBITDA--a key profit measure. We were also glad its gross margin improved. Zooming out, the company is growing faster than the digital ad market, telling us that The Trade Desk is taking share. And the company is doing so profitably. We think this was a very impressive quarter that should delight shareholders. The stock is up 22.4% after reporting and currently trades at $92.68 per share.

Is Now The Time?

When considering an investment in The Trade Desk, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

There are several reasons why we think The Trade Desk is a great business. While we'd expect growth rates to moderate from here, its . Additionally, its very efficient customer acquisition hints at the potential for strong profitability, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

There's no doubt that the market is optimistic about The Trade Desk's growth prospects, as its price-to-sales ratio based on the next 12 months of 16.3x would suggest. And looking at the tech landscape today, The Trade Desk's qualities really stand out. We are big fans at this price, even more so considering the company is actually trading at a multiple .

Wall Street analysts covering the company had a one-year price target of $77.94 per share right before these results (compared to the current share price of $92.68).

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