Happy New Year, Gumshoe friends! We’re back after a lovely break of sub-zero wintry activities, and it’s time to dust off the Thinkolator, fill up that gas tank (saving a wee bit for the snowblower on this fine and blizzard-y Massachusetts day), and see what “secret” stocks we can ID for you.
The one that caught my eye first today was another pitch from the Motley Fool — and that headline of there’s that we borrowed above explains why my attention drifted their way. Promising a stock will be the next Facebook is, of course, a rich promise to be making… but it does work to get the little drool glands going a little bit.
So what’s the stock? The pitch that readers have been asking about is from the Motley Fool, and it opens thusly:
“Not to alarm you but you’re missing out on an important and rare event.
“Renowned investor Tom Gardner has identified a stock he thinks resembles Facebook in its early days.
“And it’s growing at a torrid pace – profit grew 147% over the prior year quarter alone!”
Again, we’re reminded that in the heat of bull market (an old one, to be sure, but one that has grown stronger with age… at least so far), the very strongest bait you can use to gather possible subscribers is the fear of missing out (FOMO). And I imagine that fear has only grown now that folks are returning from holiday travels, fresh from the cocktail parties and family gatherings where their peers and/or irritating uncles boasted of buying bitcoin at $100 or Amazon at $50. How, says your fevered brain, can I catch up?
So, ignoring for the moment the riskiness of that “must catch up” sentiment, what is it that the Foolies are pitching today?
It’s another of those “Total Conviction” picks that both Fool brothers have agreed on — we’re told that the average return for a pick that both Tom and David Gardner have made is 473%, and that it has only happened 21 times… they’ve been picking stocks together for well over 20 years now, since their early AOL chatroom days, and they have a ludicrous number of “active” stock picks across their many different newsletter services, so that’s an awfully select group of stocks — and probably an old one, for the most part, which means that those crazy returns are likely to be colored dramatically by the incredible returns of a few of their best picks that they’ve recommended and re-recommended over and over, like Netflix and Amazon (David Gardner is arguably most famous for picking Amazon in 1997 and sticking with it, which would have returned something over 50,000% at this point, and Tom Gardner was teasing Netflix back in 2007 when Stock Gumshoe was still wet behind the ears, providing the all-time-best teaser stock pick with a return of better than 8,000%).
So that’s one clue… 147% profit growth, and it’s been recommended by both Tom and David Gardner. What else?
“This small cap stock has already banked $429 million for its young CEO.
“But he’s betting all of it – $429,607,700 to be exact – on something he’s calling a ‘ticking time bomb.'”
That’s not a definitive thing, “banking” money — does that mean the CEO has sold that many shares? Has seen his holdings rise to that value? Has led the company to those kinds of profits? Not sure. Let’s see if there are some other useful clues…
“Tom thinks this company’s product holds the key to even higher earnings as more and more people ditch cable for streaming TV….
“… this little company could stand to rake in billions from it.
“So, while the “cord cutting” trade has pushed millions of investors into Amazon, Netflix, and Disney… all of which are near all-time highs.
“This hidden company has been raking in cash from deals with industry titans … with almost no fanfare from Wall Street.”
And, finally, we’re told that this stock is “about 1/200th the size of Facebook” … and we can do math (the basic stuff, at least), so we know that this company has a market cap in the neighborhood of $2.5 billion. Not teensy, but certainly a smallish company, at least in the context of technology stocks.
So who is this? We can’t give the 100% certain match here, because there isn’t one… but going from those clues, the Thinkolator tells us our most likely stock pick here is The Trade Desk (TTD), which the Motley Fool has been touting off and on for much of the past year. I last covered Tom Gardner’s teased pick of this stock back in October here, and I have a small personal position in the stock as well.
Why is this the match? Well, The Trade Desk is a programmatic ad buying system — a cloud based optimization system for companies to buy ads from various publishers, using TTD’s data. They don’t work in the most aggressively “walled gardens,” like Facebook, but try to essentially give ad buyers the same sort of control on the broader web, across thousands of properties, that they can get by buying “inside the garden” with direct ad purchases on YouTube or Facebook.
And yes, they are roughly the teased size — the market cap is about $2 billion, and they are indeed focusing on the streaming and “over the top” services as a key market for video advertising (Hulu, Netflix, etc.) … and they did have net income that was roughly 147% higher year over year, though that was the June quarter (148.1% growth in net income). Their most recent quarter was stronger than that, at about 180%, but also failed to include any optimistic raised forecasts from the company, and that brought the shares down from the $60s to the $40s.
I don’t know where the Fool gets that $429 million number from… the CEO owns super-voting shares, so has a lot of voting control, but he doesn’t own that huge a percentage of the company (that’s roughly 20% of the firm, no one holds that large a percentage). And certainly the company hasn’t generated nearly that much in profits — they are profitable, which is impressive enough for such a young firm, but they have less than $20 million in retained earnings on their books. So that makes the match a little squishy this time out. Kinda makes the cynical part of me think they left that $429 million in there when they copy-and-pasted part of a teaser pitch for Shopify (SHOP) from last year, though the value of SHOP CEO Tobias Lutke’s shareholding is considerably above that level now.
It’s still an interesting company, with a long-term focus on taking meaningful share in what is still a “Wild West” business of optimizing ad buying across the internet… I tend to like their goals and their structure and the company’s plans, and I like that they’re not tied to a single technology that’s getting them into trouble (like Criteo with its tracking systems, which have allowed the stock to get cratered in the face of anti-tracking improvements by Apple and others), but the financials are still very much those of an early-stage company.
The biggest question that remains is whether they can accelerate growth by reinvesting their income, and the next quarter will give us some indication of that — and, for the short-term focused and skittish investor, it will tell us whether the company was lowballing their forecasts last quarter, or whether they really are having trouble growing revenues quickly enough to justify the stock price surge they enjoyed in the first part of 2017. We’ve got about six weeks to wait for more definitive info, the earnings are expected on February 16, but if you want to get a feel for why Tom Gardner (and David, apparently) and the Foolies like TTD, check out this interview they did with the founder and CEO Jeff Green last week (that’s free — and it gives a good perspective on Green’s ambition, which is impressive).
As for me, I’m still sitting on my small position and haven’t decided whether to add to it just yet… though I am leaning toward increasing my holdings a bit as we drift into earnings season. As always, I’ll let the Irregulars know if anything changes in my Real Money Portfolio. If you’ve got any thoughts on The Trade Desk, or think you’ve got a better match for those clues, please feel free to share them with a comment below.
P.S. There are a lot of Fool ads circulating this week… if you’re looking for that Motley Fool “next Amazon” pitch, that’s still about Shopify (SHOP)… and if you’re looking for the “tiny stock that could be the biggest Apple story of 2018,” that’s still about Universal Display (OLED).
Disclaimer: As of this writing I own shares of The Trade Desk, Amazon, Facebook, and Shopify. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.