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Is The Trade Desk a Buy?

Billy Duberstein, The Motley Fool

Over the past few years, The Trade Desk (NASDAQ: TTD) has been one of the single best-performing stocks in the market. Since its initial public offering in September 2016, the programmatic advertising software company is trading at almost 14 times its IPO price, absolutely trouncing not only the broader market but also its tech and media peers.

After such big gains, you might think you've missed the boat. After all, the Trade Desk currently trades at about 130 times trailing 12-month earnings and at a whopping 21 times sales. As a value investor who always likes to get a good price, I would normally agree.

However, there are certain instances in which long-term investors should pay up for exceptional growth opportunities. Here are four reasons that The Trade Desk meets that high bar.

A woman stands in front of a twenty-foot-high hologram of TV screens flashing by with different content on each screen.

The Trade Desk is a growth all-star. Image source: Getty Images.

1. Network effects

One of The Trade Desk's underrated characteristics is its network effect. CEO Jeff Green had the foresight to position The Trade Desk ideally in the digital advertising ecosystem, targeting the "buy side," composed of advertisers and ad agencies. This is opposed to other ad tech companies that serve "the sell side," content companies, providing the "pipes" that comprise the network upon which buyers and sellers transact, like a stock exchange.

Solely focused on buyers, The Trade Desk doesn't have a conflict of interest, as might be the case with companies that serve both the buy and sell sides of advertising. In addition, being a preferred tool for ad agencies has attracted large clients early on. Having large buy-side clients attracted ad sellers to link up to The Trade Desk's platform, giving The Trade Desk broad reach and more data, which it uses to make its product better. That attracts even more ad buyers, starting the cycle over again.

That position has enabled The Trade Desk to earn a 15% to 20% take rate -- the fee charged on a client's ad spending -- higher than that of other companies along the digital ad supply chain. The Trade Desk also has a client retention rate over 95%, which is evidence that it's providing value to customers.

2. Profits can expand

Several other software-as-a-service companies display high revenue growth similar to the Trade Desk's 55% growth in 2018 and its 41% growth last quarter. But many such companies still generate operating losses, creating uncertainty as to their future profitability.

The Trade Desk is different. It's been profitable since 2014, a full two years before its IPO. Last quarter, the company had an adjusted EBITDA margin of 20% and an adjusted net income margin of 19.1%. Even better, management has given a long-term target of 40% adjusted EBITDA margins, double the current level.

3. A huge addressable opportunity

There's also reason to think The Trade Desk can continue to grow at high rates for a long time to come. In 2018, about $2.3 billion of ad spending went through the company's software platform. That's only about 8% of the programmatic advertising market, which in itself only made up 4% of the $693 billion in global advertising spending.

According to IDC, the global ad market is forecast to grow to more than $1 trillion in the next 10 years, with programmatic advertising making up a bigger and bigger slice of the pie over its minuscule penetration today.

4. An owner-operator focused on culture and the long term

Finally, and perhaps most importantly, founder and CEO Jeff Green places high importance on qualitative aspects of his business, such as preserving a unique culture, providing a compelling career path for employees, and other factors that can help The Trade Desk stand out. Green gave an example at the company's recent investor day presentation, saying that unlike other large tech companies, The Trade Desk doesn't force employees to become managers of others if they don't want to, even as they rise through the ranks.

Nuances like these may not be apparent just from the company's financial statements, but they are a reason that the company ranked No. 2 on Forbes' Best Places to Work in 2018, and they are another reason I think The Trade Desk is built to last.

Somewhat volatile, but growing long-term

For all these reasons -- business model, profitability, growth prospects, and management's focus on culture -- long-term-oriented investors shouldn't wait to take a position in The Trade Desk. Just keep in mind that growth stocks can be volatile, so be sure to keep a reasonably sized position, with an eye toward adding on future dips.

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Billy Duberstein owns shares of The Trade Desk. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends The Trade Desk. The Motley Fool has a disclosure policy.