Sound familiar? It is, kind of — the Motley Fool has been running teaser ads for “Cord Cutting” and the “Death of Cable TV” for years now (I covered a handful of them back in 2018, for example), and it’s a nice real-world theme: We’ve all seen that cable TV subscriptions are dropping and the television industry is changing pretty dramatically, so we can all relate.

This particular teaser pitch is a little bit new, though, and quite a few readers have asked about it this week, so I thought we’d dig in to see what they’re focused on now. Are they still teasing the same stock for this theme? Well, probably… but let’s see what they say in the latest version of the ad, which is a pitch for their flagship newsletter, Motley Fool Stock Advisor (usually $49 for new subs, renews at list price, which is currently $199/yr):

“The second-wave of the cord-cutting revolution is just beginning.

“And if you missed your chance to get in on Netflix early…then you are going to want to see this.”

OK, so teaser-writing 101 at the Motley Fool — we can check the “FOMO” box. What else…

“Because cord-cutting is finally going mainstream.

“Fortune magazine reports that by the end of last year, over 30 million American households no longer paid for cable…that means nearly 1/4th of all Americans have already kicked cable to the curb…

“And it’s setting up an incredible opportunity for one tiny American company.”

OK, they’ve thrown in a brand-name expert in Fortune Magazine, and it’s true, though that number is even worse now. Pay TV penetration of US households, which includes people who buy the cable-like subscriptions over the internet like YouTubeTV or Hulu Live as well as traditional Comcast and other cable and satellite TV subscribers, has now dropped to 58.5%, which is the lowest penetration in 30 years. The cord cutting has not slowed down, and in some quarters it has accelerated, traditional pay TV is losing something like 8-10% of its subscribers every year now.

The transition is obviously painful for those companies whose business plans rely on the old “cable bundle,” like Disney, but we’re probably still a long way from knowing whose content strategy will be the winner. It’s been a golden age of television for consumers, who have more high-quality choices than ever, but not many have figured out how to make streaming TV anywhere near as profitable as the cable TV business was over the past 20 years.

What else do they say about this stock? Not many details, I’m afraid:

“… this company’s AI powered platform has allowed it to rack up a mountain of cash from the cord-cutting revolution.

“Now, we would never promise that this company will generate returns like Netflix…

“But with thousands of Americans cutting the cord every single day…we don’t think we’re too far out on a limb with this prediction:

“Five years from now, we think you’ll probably wish you bought this stock.”

Who is it, then? Well, today we can’t rely on the Thinkolator — there are no actual clues hidden in the ad which can pinpoint the stock for sure… so I’ll have to rely on my experience following the Motley Fool’s advertising teasers for 20 years now. And that tells me I’m almost sure that this is yet another teaser pitch for The Trade Desk (TTD), which does indeed run a platform (partially AI-driven) for ad buying, and is getting a lot of its growth from companies shifting their TV ad buying from linear TV and traditional cable to streaming TV platforms. They’ve been teasing and recommending this stock since at least mid-2017, and I also bought it around the time I researched it for one of those early Stock Advisor TTD teaser ads, and it has been a hum-dinger since then.

They could also be throwing in some of their other long-time favorites as plays on this “cord cutting” revolution, including stocks like Netflix (NFLX), Roku (ROKU), Disney (DIS) or others, including perhaps some of the other ad platforms like Magnite (MGNI) or PubMatic (PUBM) that they’ve recommended in the past for various Fool newsletters… but I’d bet that their primary focus is still The Trade Desk.

Here’s how The Trade Desk describes itself:

“The Trade Desk™ is a technology company that empowers buyers of advertising. Through its self-service, cloud-based platform, ad buyers can create, manage, and optimize digital advertising campaigns across ad formats and devices. Integrations with major data, inventory, and publisher partners ensure maximum reach and decisioning capabilities, and enterprise APIs enable custom development on top of the platform.”

The beauty of the model is that they effectively sell subscriptions to data feeds and software, but mostly they’re dealing with large advertisers and ad agencies on master service agreements, and their revenue is really a share of the money spent by advertisers on buying ads through the Trade Desk platform — their sales are pretty consistently about 20% of the gross spending of their customers. That makes the business nicely scalable, and they operate in a truly massive market, so even though they’ve grown the gross spending of their customers on the TTD platform to close to $8 billion a year now (from $1 billion at the IPO in 2016), they’re still a bit player in the ad world (digital ad spending is about $135 billion a year, linear TV is still larger than that at $165 billion… overall, roughly 1% of total global ad spending goes through The Trade Desk’s platform right now).

They do spend a lot on growth and development, including on new platforms like Unified ID to try to build a better advertising world outside the “walled gardens” of Facebook and Google, but the core business could grow nicely with a lot less spending if they ever opt to slow down that investment. Hasn’t happened yet, so they are marginally profitable… pretty much as they have been since their IPO. Their last investor presentation is here, if you’d like to familiarize yourself with the business a little. It’s a pretty remarkable company.

And, no surprise, it’s also a pretty expensive company. Here’s part of what I said to the Irregulars in last week’s Friday File, following the latest TTD quarterly update:

We’re nowhere near the valuation extremes we reached in 2020 and 2021, TTD briefly traded at more than 60X sales at times and is back to about 20X, roughly where the shares were trading pre-COVID, but valuations have fallen across the board, and it’s still very expensive on a relative basis. Going into earnings, the shares were valued at about 55X expected 2023 earnings and 44X 2024 estimates… and those, I remind you, are the adjusted earnings — if you use GAAP earnings and properly assume that stock-based compensation is a real expense, the forward PE right now is in the 225 neighborhood (GAAP earnings are expected to be 33 cents per share this year… adjusted earnings $1.20). The big tech companies have evolved to use GAAP earnings and honestly report the impact of stock-based compensation, but a lot of the smaller growth-focused companies like TTD still really hunker down on those “adjusted” numbers. Stock-based compensation is a hard drug to give up.

Cash from operations keeps growing, but of the $549 million in cash TTD generated last year, 90% of it, $499 million, was due to stock-based compensation (meaning, they generated free cash flow because they were able to pay employees with shares instead of with cash). The situation was similar in 2021, largely because the stock price was often so high, but that wasn’t always the case, TTD had $242 million of real net income in 2020 and generated $405 million in cash, with only $112 million of that coming from stock-based compensation, so I’m watching that number, and hoping it will moderate again.

So far so good, in the first quarter they used only $113 million in stock-based compensation, less than a year ago, and it accounted for only 60% of the cash flow from operations, a big improvement from 90%. They also followed through with their promise last quarter to buy back shares and help make up for the dilution, and actually bought back twice as much as they paid out to employees in the quarter. The share count is still going up over time, and this high level of stock-based compensation is still misleading, it essentially capitalizes employee compensation instead of treating it like an ongoing expense… but at least it’s getting significantly better at the moment.

GAAP net income stopped growing in 2020, but cash flow kept jumping higher… the net income in 2022 was only $53 million, roughly the same as it was in 2017. The share count has grown 15% in the past five years, and the company is getting much bigger and stronger, but they still only grew revenue per share by about 250% over that time, and earnings per share actually shrunk over the past five years, so the share price growth of 1,000%+ is all due to optimism about the future. Reasonable optimism, I think, but still optimism… and optimism about the future, in case you haven’t noticed, can change a LOT more quickly than earnings or revenue.

So what happened this quarter? More optimism, really, as they reported stronger numbers than expected, further reinforcing the “advertising is not as dead as you think it is” narrative that we heard from folks like Meta and Alphabet in weeks past. Their adjusted earnings came in at 23 cents per share, and revenue grew 21.4% over last year, which meant it was about 5% above the analyst estimates… and they also raised their forecast for the current quarter, so they’re expecting $452 million in revenue next time they report (which would again be about 20% annual growth). With all the question marks hanging over so many high-growth tech stocks, TTD was a bit of a breath of fresh air — they got back to the “beat and raise,” they said optimistic things about the dramatic growing demand for streaming video ads, (they call it “connected TV”), and they clearly still have ambition to continue growing their still relatively small market share.

As part of that Friday File article I updated my “preferred buy” and “max buy” levels for the Real Money Portfolio as well, though not dramatically so, but I’ll leave that info for the paid members who keep Stock Gumshoe going. TTD is one of my larger holdings, personally, and it’s one the best-performing stock in the Real Money Portfolio on an annualized basis, though I haven’t bought or sold any shares since 2021.

The Trade Desk and Arista Networks (ANET) have been the most overwhelmingly repeated teaser targets for the Motley Fool in recent years, with TTD most often getting the “all in” or “double down” buy alert pitch, and they’re great companies… but I can’t say that I see any pattern in The Trade Desk’s share price that leads them to promote it more or less often — they’ve been as happy to tout the stock at $80 as at $50 over the past few years, the Fool’s Stock Advisor service seems pretty genuinely unconcerned with current valuation and has doubled down on their strategy of buying the highest-quality long-term growth stocks, almost regardless of current price. That works out well if you pick a few of the 10,000%+ winners over time to make up for the losers, as the Fool has, to their credit, but certainly a lot of people, myself included, like to try to be a little more disciplined and patient with entry prices.

So… have any thoughts on TTD? Other favorite plays on cord cutting or the evolution of advertising? Let us know with a comment below… and thanks, as always, for reading.

P.S. New readers always want to know what newsletters are really like… so if you’ve ever subscribed to Motley Fool Stock Advisor, please click here to share your thoughts on our Reviews page… thanks!

Disclosure: Of the stocks mentioned above, I own shares of Alphabet, Roku, PubMatic and The Trade Desk. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.