Fool’s “Obscure Company Growing Faster Than Google and Facebook”

What's being pitched as the stock Tom Gardner recommended on Friday?

By Travis Johnson, Stock Gumshoe, October 23, 2017

Today we’ve got another pitch from the Motley Fool to look at, all about Tom Gardner’s “Latest stock pick” … so can we figure out what it might be?

Let’s check out the clues, Gumshoe-style. It’s a brief pitch that’s trying to lure you into subscribing to Motley Fool Stock Advisor with their regular “you’re about to miss an important event” — which is, of course, that David and Tom Gardner “just released two new stock picks.”

Stock Advisor is the Fool’s “flagship” newsletter that features competing recommendations from Tom Gardner and his brother David each month (David’s way ahead, for what it’s worth, and tends to be the more “growth” focused advisor while Tom leans “value”). Stock Advisor has a very impressive long-term record of beating the market, though they are also extremely reluctant to sell, so their portfolio of covered stocks is huge after more than a decade of stock picking and they tend to let both winners and losers run, which frustrates some subscribers who don’t pick and choose the better ideas for their own portfolio — a decent chunk of the outperformance has come from a few dramatic winners (Priceline, Netflix, Marvel/Disney, a few others that rose by 1,000% or more).

So will this particular teased idea be another huge runner, or an also-ran? Here’s what we get from the ad:

“We hear over and over again from so many investors that they wish they’d gotten into stocks like Google or Facebook earlier…

“Well, Tom just gave the green light to a company only 1/200th the size of Facebook and 1/300th the size of Google…

“… but growing revenues 2X faster than either of these “can’t beat” companies!
And how is this company doing it? – By dominating a little-known niche of the advertising world.”

The only real rationale we get for this particular idea is that this company is similar to Google and Facebook years ago, before their advertising niches became major businesses… and it’s in yet some other niche of the advertising business.

And a couple more clues:

“… shares are already up over 69% in the past six months! And looking ahead to all the potential growth in front of this company, Tom is betting there is so much more to come!

“Lucky for you, Tom only unveiled this latest pick to Stock Advisor members yesterday! Which means the stock market was only open for 4 hours after it came out.”

OK, so we know it’s an advertising stock, with a market cap of about $2.5 billion (just doing that “1/200th” math in the pitch), and we know it went up 69% over the past six months and probably popped around Noon on Friday (that’s the “yesterday” in the spiel).

Is that enough? Well, maybe… let’s put the Thinkolator on the job. First we gotta wrestle get the dust cover off, add a little warm oil, pull the crank a few times… and voila! This is almost certainly… Trade Desk (TTD)

Trade Desk is not a precise match, because it actually rose 79% over the past six months, not 69%… but it is a small niche company in the digital advertising business, it has a market cap of about $2.6 billion, and it popped instantly by about 2% at Noon on Friday, when nothing else was happening and there was no other relevant news I’m aware of. So I’m pretty confident that’s Tom Gardner’s pick.

So why would he recommend Trade Desk? Here’s a Motley Fool free article that gives some of the rationale, explaining the rapid growth TTD has had since coming public a little over a year ago (the disclaimer in that article also confirms that the Fool both owns and recommends Trade Desk, though it doesn’t specifically say when or in which newsletter, so this teased recommendation by Tom Gardner could be a re-recommendation in Stock Advisor, or it could have originally been recommended by Rule Breakers or one of the Motley Fool’s other newsletters).

The Trade Desk just had an investor day a couple weeks ago, so you can review their presentations here if you like — that’s certainly worth doing if you’re considering adding the stock to your portfolio… they are, to overly simplify, a provider of buy-side analytics and ad targeting for digital advertising, and they aim to be quite broad in scope while taking market share in digital advertising and presenting a compelling competitor, for ad buyers, to the “walled gardens” of Facebook and Google (though they presumably will also always have to work with both Facebook and Google as well).

They see their big growth areas as China and “connected TV” (they see video overtaking mobile when it comes to digital advertising, and a continued important role for personalized video ads in the “over the top” digital video services). They also envision all advertising being programmatic — ie, all essentially controlled by self-service digital decisionmaking, and soon artificial intelligence, and they think they have a big role to grow into as a voice for and moderating influence for the buy side (ad buyers) in a world where ad sellers like Facebook and Google are widely thought (among ad buyers, at least) to be too powerful.

The stock is not necessarily cheap after the big run it had this year, but the company has been consistently profitable for years, which helps it to stand out in the “ad tech” marketplace (Criteo, which I’ve held for a while, is the only other ad-tech startup I’ve run across that’s smallish and sustainably profitable). They currently trade at 37X next year’s estimated earnings, but have also beaten earnings estimates pretty substantially in each of their first four quarters as a public company — so analysts are having some trouble getting a handle on the growth rate and have had to continually increase their estimates.

If that continues, the stock will keep going up — with smallish growth stocks like this it’s all about feeding the expectations beast, if they keep it up with the “beat estimates and raise forecasts” quarterly reports, the stock will probably keep rising. That gets a little harder now that the estimates are getting more aggressive (three months ago the forecast for 2018 was $1.34 in earnings per share, now it’s $1.70), but if you catch a company at the fairly early stage of that kind of growth it can be a really fun ride.

The downside, of course, is that sometimes the ride throws a rod — if Mr. Market builds a stock up into a “beat and raise” machine in your mind, the punishment that stock receives when they don’t “beat and raise” is severe — the shares could easily fall by 20-30% in a day if they come out next quarter and miss earnings by a few cents and fail to increase their forward guidance. So be aware that this is the kind of tightrope you walk with a growth company.

The good thing, of course, is that The Trade Desk is still very small in an industry of behemoths — so there is no shortage of revenue they could try to go after, and they are nowhere near maxing out on their potential market share. The positive I see is that they could get a fair amount of “buy side” buy-in if they can convince the Procter & Gambles and the WPPs and the other big ad buyers that they are the most viable alternative to being captive in the “walled gardens” of Facebook and Google content, and that’s both a possible economic incentive for the big advertisers and a strategic imperative to not be too beholden to one or two ad platforms.

The bad thing, of course, is that digital advertising is so dominated by Google and Facebook that they can get squeezed — much like Criteo (CRTO), which is facing some challenge because they don’t “own” customers (like Facebook owns the data about its users) and therefore are worried about regulatory or product restrictions (like ad blockers, or changes to browser settings) that might cut into their ability to track behavior for advertising purposes.

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The Trade Desk is not nearly as dependent on a specific tracking technology as Criteo is, and in fact they partner with several technologies that offer that kind of user tracking across devices (and offer a variety of other services), but they are still a small player in a field where data ownership may be becoming more important and those who collect advertising data from people who are not their own customers may be sometimes pressured or locked out.

So there are plenty of risks — chief among them regulatory risk and