I’ve had a bunch of new questions about this almost evergreen Motley Fool ad for their Stock Advisor service, so I thought I’d share some answers with you here — partly because this is a stock that I write about a lot for our paying members, since it’s a substantial part of my portfolio, but I haven’t shared my thoughts on it for “free” members in over a year.
So what’s the stock?
This is one of the Fool’s “home run” or “double down” alerts — an ad that’s not dated, but that makes the point that the relatively few stocks that get recommended by both of the Gardner brothers at the Motley Fool are unusually great stocks (the brothers are David and Tom, who together founded the Fool and run both the company and the flagship Motley Fool Stock Advisor). This is what they say about that “indicator”:
“It’s rare that David and Tom formally agree on the exact same stock – it’s only happened 23 times over the entire history of Motley Fool Stock Advisor.
“But when it has happened, the results have been spectacular:
“Netflix is up 12,862% since Tom agreed with David on it in June 2007
“Tesla, which received the “Home Run Buy” sign in November 2012, is up 835%
“In fact, across the 23 stocks David and Tom have agreed on … the average return is an astounding 912% … crushing the S&P 500 by more than 11x!”
So what’s the latest “home run” stock?
Here are the clues:
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“… neither David or Tom would ever describe this stock as a ‘sure thing,’ but the details behind this tiny little internet company are impressive:
“It’s smaller than 1/100th the size of Google.
“Each one of David’s and Tom’s recommendations of its stock is crushing the market.
Its young CEO has already banked $575 million on this stock since its IPO.”
That’s a poor choice of words, I’d say — “banked” implies that you’ve made a ton of money and put it in, well, a bank, at least metaphorically. That’s not what this “young CEO” has done, he just owns a lot of the stock because he founded the company, and has seen it increase in value dramatically as the stock has risen. He’s “betting on” the company to the extent that he hasn’t sold all those shares, but he also isn’t buying — and has, in fact, sold thousands of shares that he’s been granted by the company as compensation over the years.
What does the company do?
“This company stands to profit as more and more people ditch cable for streaming TV….
“… sits in the middle of the advertising market, which is more than 10X bigger than the online streaming industry….
“In an interview with Tom Gardner and his team, this company’s CEO called the current moment ‘the most exciting in the history of advertising.'”
And we get a reiteration of that “he’s got skin in the game” idea:
“this CEO is putting his money where his mouth is.
“He’s betting his fortune – $575,715,640 to be exact – on what he’s calling cable TV’s ‘ticking time bomb.'”
So yes, this is, of course, good ol’ The Trade Desk (TTD).
And we’ve seen the Motley Fool recommend and re-recommend this stock many times over the past couple years — I first nibbled on the shares back in the fall of 2017 when Tom Gardner was pitching the shares, and it was the best teaser stock of 2018.
The Trade Desk provides a data-fueled programmatic ad-buying software and access to purchasing (and monitoring) ads for the “open internet” (as opposed to the “walled gardens” of Google and Facebook), and they’re growing in all the areas that other advertising folks are growing, with huge volume in things like in-app advertising and mobile video, but they are also growing very fast in streaming — placing ads in services like Hulu, which they think is a major growth area (the argument being that advertising dollars will grow in importance for streaming services as they compete and as customer acceptance of higher and higher subscription fees to fuel content creation will be limited). Their customers are major advertisers and ad agencies, and they place themselves in the middle as a disinterested gatekeeper — they don’t own the content, and can provide data to help advertisers automatically place their ads alongside the best content.
They’ve grown like mad since I bought shares, though there have also been some meaningful dips along the way — I haven’t added to my position for about six months, and it’s now a top ten holding in my Real Money Portfolio so I’m unlikely to increase that allocation… though I still like the company a lot, and have resisted the urge to take profits.
Here’s what I wrote about this company to the Irregulars in my Friday File two weeks ago, after their latest earnings report:
The Trade Desk (TTD) beat the analyst expectations for both revenue and earnings this quarter, but not in a hugely dramatic way and still showing evidence of the fact that the growth is slowing down a bit as they get bigger… which is a natural and expected occurrence.
The shares were initially a little weak in the pre-open trading thanks to the flat forecast for the second quarter, though they did raise their expectations for the full year. When a stock is trading at this kind of nosebleed valuation, you really need to shock investors with growth to keep the shares going, and we had gotten used to that because TTD had been in a habit of offering very conservative guidance that led to some dramatic “beat and raise” quarters in the past, but this “beat” was more subdued and that might well have been what got the worries started. Expectations matter.
But that was just the initial reaction to the numbers before the market opened on Thursday… the reaction a little later became much more dramatic, which means, to me, that maybe investors started to freak out about CEO Jeff Green’s comments on the conference call about spending more money to grow market share in programmatic advertising.
Why? I don’t know. Perhaps those who were clambering all over this as a oft-repeated recommendation of the Motley Fool thought that TTD had somehow magically become the only ad-tech company around, or was going to get a pass on taking over the world. That never happens, or if it does happen it’s an accident… and, well, investors are freaking out this week in general and this is a stock that has quadrupled in value over the past year (and more than doubled just since January), growing the stock price far faster than the underlying company could grow the business, so volatility comes with the game. When a stock doubles in a couple months, you attract investors who are expecting dramatic things every time a new quarter is released, and this quarter, while very good, was not at dramatic in the context of TTD’s past performance.
Still a great company, still a pretty insane valuation if you use the PE ratio for this year or next year, and being worthy of that valuation depends on rapidly rising revenues from their advertising partners as programmatic advertising takes over more and more of the market (most of their customers are ad agencies, though companies also run their own advertising campaigns)… and the challenge is still probably mostly competition as they try to take leadership of the “open internet” and wrest power away from both their smaller ad-tech competitors and the huge “walled garden” marketplaces (Facebook and Google, mostly).
The Trade Desk is growing fast, the market it operates in is growing fast, management is incentivized to grow and they’ve built something gigantic very quickly, and to some extent it could be built on quicksand. This is a technology company that provides a service to a relatively small number of advertisers… if a better product comes along, they can lose.
I don’t think they will, and I love their continuing push to integrate the “open internet” with their shared cookies, which seems to be getting some traction with big advertising groups and networks, but I am, of course, watching the stop loss trigger point for these shares because it’s a momentum stock with a crazy valuation, and big sentiment swings can easily cut the shares in half even without a major failing or a “miss” on the part of the company. Because we have to be prepared for volatility in stocks that have surged this much, the stop loss trigger is way down near $135 a share now… I don’t expect we’ll hit that, there was no actual bad news in this report, just a fear from investors that growth won’t be as fast as they hoped, so I think I’ll just be watching for a while.
The key reasons to hold on, I think, are the excellent management team and the massive size of the market, combined with the clear scalability of the business (which is mostly providing software subscriptions and access to data)… the cost of providing the platform for their actual product offerings is fairly low, giving them a gross margin of 75-80%, but we really want to see whether they can continue to grow profitably without having to invest too much more and more in sales or overhead — and so far they have. This quarter they spent a little more, and it sounds like they want to spend still more on expansion if they can find things to spend that money on, so the company will probably want to continue to be evaluated as a revenue growth company and not an earnings growth company, which will offend some folks, but it’s clearly working pretty well.
They’re still tiny relative to the addressable market, but they have pretty quickly sucked up a lot of the oxygen in the programmatic advertising market with their relationships with large advertisers and their strong customer retention, so they may well be able to continue leading… and they don’t need money, which is a competitive advantage over some of the smaller upstarts — they are profitable and can self-finance this continuing aggressive growth, particularly into Europe and Asia, even if they choose to reinvest those profits instead of reporting them.
I really like CEO Jeff Green and his vision, and that’s a subjective determination but it’s also not a small thing — confident leadership with a bold vision of the future is part of the difference between Netflix and Blockbuster. It doesn’t mean they’ll keep winning, and the stock price could certainly fall if they have a bad quarter (it has in the past), but for me this has been a hold all year simply because it is already such a large part of my portfolio… if I did not own any shares, I’d probably consider a small nibble here after this dip if you’re interested in the five-year story.
It turns out that I was right to be a little nervous about the run up into earnings last week, and the better short-term decision would have been to take a little profit off the table, but that kind of short-term sentiment-based trading is usually a mistake (which is why I try to resist it, not always with success). I don’t think The Trade Desk is done growing… the stock got a little too high in expecting another dramatic “beat and raise” this quarter, but the company itself is still doing the right things and still showing strong performance in every real way. It’s not cheap, it’s not an easy buy even at $180, but if they keep doing things right they’ll keep growing into that valuation and moving the yardsticks, so it’s not likely to ever be cheap enough to be “easy.”
Trade Desk CEO Jeff Green is great at telling his “story”, and is a good salesman for the stock — and, yes, he still owns a huge stake and it’s worth something like a half billion dollars. If you want to see his sales pitch, he also appeared on Jim Cramer’s show on CNBC following the earnings dip — here’s an excerpt of that video:
Whether it will work out, well, we’ll see — I give this one a lot of rope, but these days it also trades at more than 50X forward earnings, and the growth is widely expected to “decelerate” (they’re still seen as doubling revenue from 2018-2021, but spending heavily and not quite doubling earnings in that time). On the other hand, apparently the Fool keeps trotting this out as a favorite for their Stock Advisor subscribers, a group that I think numbers close to half a million people now, so that probably helps with the “buy the dip” response from investors whenever things get a little less rosy… at least for now.
How about you, dear readers? Willing to gamble on a stock that has already risen so fast? Think the next leg up is coming soon, or that the shares will come back to earth? Let us know with a comment below.
Disclosure: Of the stocks mentioned above, I own shares of The Trade Desk, Google parent Alphabet, and Facebook. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules. Current positions are updated regularly in the Real Money Portfolio.
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