The Trade Desk (TTD)

Advertising software maker The Trade Desk (NASDAQ:TTD) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 25.4% year on year to $616 million. Guidance for next quarter’s revenue was better than expected at $682 million at the midpoint, 0.8% above analysts’ estimates. Its non-GAAP profit of $0.33 per share was 33.2% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, The Trade Desk’s sales grew at a solid 25.8% compounded annual growth rate over the last three years. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, The Trade Desk reported robust year-on-year revenue growth of 25.4%, and its $616 million of revenue topped Wall Street estimates by 7%. Company management is currently guiding for a 16.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 14.7% over the next 12 months, a deceleration versus the last three years. Still, this projection is admirable and indicates the market sees success for its products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

The Trade Desk’s billings punched in at $3.07 billion in Q1, and over the last four quarters, its growth was impressive as it averaged 25.9% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

The Trade Desk is extremely efficient at acquiring new customers, and its CAC payback period checked in at 4 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give The Trade Desk more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

The Trade Desk’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 80.1% gross margin over the last year. That means The Trade Desk only paid its providers $19.89 for every $100 in revenue.

In Q1, The Trade Desk produced a 76.8% gross profit margin, marking a 2.1 percentage point decrease from 78.9% in the same quarter last year. The Trade Desk’s full-year margin has also been trending down over the past 12 months, decreasing by 1.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

The Trade Desk has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 17.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, The Trade Desk’s operating margin rose by 5.3 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, The Trade Desk generated an operating profit margin of 8.8%, up 3 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

The Trade Desk has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 26.7% over the last year.

The Trade Desk’s free cash flow clocked in at $229.7 million in Q1, equivalent to a 37.3% margin. This result was good as its margin was 1.4 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict The Trade Desk’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 26.7% for the last 12 months will increase to 26.6%, it options for capital deployment (investments, share buybacks, etc.).

Businesses that maintain a cash surplus face reduced bankruptcy risk.

The Trade Desk is a profitable, well-capitalized company with $1.74 billion of cash and $335 million of debt on its balance sheet. This $1.41 billion net cash position is 5.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly The Trade Desk blew past analysts’ EBITDA expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. Looking ahead, Q2 guidance for revenue was roughly in line while EBITDA guidance beat, suggesting strong profitability trends. This was a strong quarter, especially considering the weak print last quarter that had investors worried. Zooming out, we think this was a solid print. The stock traded up 9% to $65.40 immediately after reporting.

Updated: May 22, 2025 at 10:17 PM EDT

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

There are multiple reasons why we think The Trade Desk is an amazing business. For starters, its revenue growth was solid over the last three years. On top of that, its efficient sales strategy allows it to target and onboard new users at scale, and its impressive operating margins show it has a highly efficient business model.

The Trade Desk’s price-to-sales ratio based on the next 12 months is 12.6x. Looking at the software landscape today, The Trade Desk’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $86.32 on the company (compared to the current share price of $74.63), implying they see 15.7% upside in buying The Trade Desk in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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