This article was originally published on November 17, 2021, but as the Fool toys with testing different headlines for this recurring ad we continue to get more questions, so I’m re-posting that story here to help answer them — I’ve made a couple minor updates, but the story and the numbers for the “secret” company haven’t really changed since November (though the stock is down about 35%, largely because of a market-wide reset for “growth” stock valuations).

Sometimes I forget that not every Gumshoe readers scours through all of my articles, or has ardently followed every teaser solution we’ve published since 2007… so as I see the same questions over and over and over, sometimes responding to emails to let people know what kind of story they’re being sold, I do find that occasionally I can go for a year or two without covering a hotly-requested story just because I feel like I’ve covered it before.

And that’s what’s happening here today, the Motley Fool is using a somewhat new tag line to pitch a stock they’ve recommended many times over the years, but I haven’t shared my updated thoughts on it in a long time — so it’s time to catch up and remember that new readers need answers, too.

The big push this time is for Motley Fool Stock Advisor, which is their entry level flagship newsletter (it’s often sold for $49 or a similarly low price, as is the case now… and the Fool has generally been relatively customer-friendly when it comes to stuff like refunds and trial periods, but, like most publishers, once you sign up you’ll get renewed at the regular price ($199, I think), and will then be inundated with promos for their $1,299+ “portfolio” services and other upgrade subscriptions).

And the “Five Star” term they’re using today is very similar to the “double down” term that the Fool has used in selling its most successful stock picks in the past… here’s a little excerpt of the ad:

“… every so often, we come across a stock so good… that we just have to double down on it.

“Many of us around the office have come to call this re-recommendation an “Five Star” buy sign.

“And one stock in particular is simply begging for another recommendation.

“But this ‘Five Star’ approach… this isn’t some shot in the dark.

“Some last ditch bet at a poker table.

“This investing trick is straight from the playbook of one of the greatest investors of all-time: Peter Lynch.

‘Selling your winners and holding your losers is like cutting the flowers and watering the weeds,’ – Peter Lynch”

“Here at The Motley Fool, we take that same approach – add to your winners. And this isn’t some everyday occurrence.

“But the 93 times it has happened, the results have been spectacular….”

We get a few examples, as is always the case with these Fool ads — they say Netflix (NFLX) got the “five star” treatment in June of 2007 and has returned 24,143% since then, and Tesla (TSLA) in November 2012, 16,128% ago. Those claims are true, the Fool did pick those and a few other massive winners (Amazon in 2002, NVIDIA in 2005, Salesforce.com in 2009, etc.), and, perhaps more importantly, their extreme reluctance to sell meant that those stocks are all still in the Stock Advisor portfolio.

Motley Fool Stock Advisor has beaten the market pretty dramatically over a very long period of time, but the returns are overwhelmingly provided by their top dozen or so stocks out of several hundred picks, so whether or not you’re a happy subscriber probably depends on which stocks you decided to buy along the way. And whether you had the stomach to hold some of those better picks for a long time, since all of them have had multiple periods when they’ve fallen by more than 40-50%, which is painful for many people, and sometimes as much as 60-80%. Theirs is very much a strategy of doubling down on winners and letting losers lose without selling them, counting on each of the huge gains to offset a bunch of disappointments.

So which of their past winners is this “Five Star” pick today? Here are the clues from the ad:

“The Under-the-Radar Stock

“Now of course, we would never tell you to go ‘all-in’ on one stock — our research shows the best way to build lasting wealth is own a diversified portfolio of multiple stocks — 25 or more is great.

“But the details behind this tiny little internet company are impressive:

• It’s 1/50th the size of Google.
• Each one of our previous recommendation is crushing the market.
• Its young CEO has already banked $2.3 billion on this stock since its IPO.

Other clues? This company is in the advertising business, but is also connected to streaming video in some way:

“This company stands to profit as more and more people ditch cable for streaming TV. And in fact, we believe this company’s crucial technology could represent the final nail in the coffin for traditional cable.

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“Now this isn’t some competitor to Netflix, Hulu, or Amazon Prime Video as you might expect. Instead, this company sits in the middle of the advertising market, which is more than 10X bigger than the online streaming industry.”

Starting to sound familiar? Yes, we’ve seen lots of companies emerge in recent years to try to profit from the growing spending on streaming video ads, but there’s one clear winner from the Fool portfolio in that group.

A couple other hints are dropped, just to make sure the Thinkolator’s answer is 100% accurate:

“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…

“He’s betting his fortune – over $2.3 billion – on what he’s calling cable TV’s ‘ticking time bomb.'”

Those phrases have come up over and over in the pitches for this stock, going way back to the first time it was teased by the Motley Fool in October of 2017... so yes, this is still The Trade Desk (TTD). And it has been one of the better picks from the Fool during that time, often sitting atop the charts of best-performing teaser picks as it has been pitched over and over in subsequent years.

The Trade Desk is a leader in what’s usually called “programmatic advertising” — selling ad-buying software and access to an ecosystem of data and ad inventory to big advertisers, including all of the major ad agencies. Here’s how they describe themselves:

“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 more expressive data-driven digital advertising campaigns across ad formats, including display, video, audio, native and social, on a multitude of devices, including computers, mobile devices, and connected TV. 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.”

And yes, Jeff Green, the founder and CEO, does have billions of dollars “bet” on the future of this programmatic advertising platform… though it’s not like he’s buying the stock, his “bet” is that he’s keeping most of the shares he owns as the founder, and the shares he is granted as CEO each year. That fortune of his keeps growing as the stock sets new highs, and he just recently announced that he had signed the “Giving Pledge,” joining Bill and Melinda Gates and Warren Buffett’s high profile initiative to get the wealthy to promise to give away 90% of their fortunes “before or at death.”

To further match those clues, TTD is about 1/50th the size of Google (or it was a week or two ago, at least — Alphabet’s market cap is around $2 trillion now, so that would be $40 billion — TTD has been below $40 billion for most of 2021, though has popped above that level this week).

And Green did indeed start calling cable TV a “ticking time bomb” in interviews several years ago, and that’s still his characterization as recently as last week’s quarterly conference call, as he continues to forecast that everyone will consume content via connected TV (what most folks call streaming TV). The Trade Desk was very early in building its presence in connected TV, as Green argued that streaming TV would only really reach its potential if it embraced a “free, ad-supported” strategy, and it has been their fastest-growing business segment pretty consistently over the past four years. And now their single largest segment, too, as connected TV accounted for 40% of revenues last quarter.

This is a stock I’ve owned for a long time as well, so it has become one of my larger holdings and, unlike the Fool, I’ve become a bit more conservative about “doubling down” given the much higher valuation now… but I did also post an update for the Irregulars in a Friday File, following TTD’s latest quarterly update, so I can give a little bit of perspective for folks who are new to the stock and not burdened with the baggage of having studied it when it was at much lower prices (my first buy was at a split-adjusted $6 or so, and it’s hard to not anchor your thinking on old prices and valuations). Here’s a little excerpt from that article:

11/12/21: The Trade Desk (TTD) posted a pretty strong “beat and raise,” though that’s almost always the case with TTD and this “beat” was not particularly big — and, I should note, the expectations had already fallen in recent months, as worries about fourth quarter advertising hit a lot of ad-driven stocks. The company was expected to earn 15 cents per share, and they earned 18 cents, and revenue of $301.1 million came in about 5% above the $284 million expected. For a company trading at a wild valuation in a period of some worry about fourth quarter advertising (several companies have warned that many advertisers are not being aggressive about the holiday season, at least partly because they’re worried they can’t get enough inventory to sell), I would have assumed that it would take an aggressive forecast to get investors excited… but that wasn’t the case. TTD issued fairly cautious guidance for the fourth quarter of “revenue of at least $388 million,” which doesn’t really count as an upside driver since analysts were already penciling in $390 million for that quarter… and yet, the stock popped by 30% on Monday, getting close to their highs for the year, and has continued to climb through the week, setting new all-time highs today.

Why the enthusiasm? Perhaps it’s just relief, coming from the fact that they didn’t really say anything negative about the programmatic advertising environment? I Dunno. It’s a great company, and it’s still ludicrously valued… albeit a bit less ludicrous than it was nearly a year ago, when it was last in the high $90s (that’s not so far from where it stands now, but at the time TTD had trailing revenue about 30% below the current levels, so it boasted a markedly more optimistic multiple).

I really like this company, but the highest valuation I can easily talk myself into for TTD, since it’s been one of my biggest positions for years and I’m not in a particular hurry to make it much larger, (partly because of the general risk profile of my portfolio right now, which is very overweight in high-valuation momentum growth stocks), is about 25X revenues. That’s the highest buy price I could ever imagine endorsing for any large company, which is indicative of what a strong market share they’ve built in providing advertising data and data-driven ad placement for customers who don’t want to be beholden just to Google, and to the vast size of the market they operate in.

25X trailing revenues for the past four quarters would give us a valuation of about $28 billion (~$59/share), and using forward estimates for 2022 of $1.5 billion in revenue would give us about $37.5 billion as a buy target (~$78/share). We were in that range a few weeks ago, but not any more.

They have been growing into higher profitability as their business scales, as well, and analysts don’t see their margins continuing to improve in the future after this year’s big jump… but they might (the gross margin can’t get much better than the ~80% or so they’ve maxed out at over the past five years, but they may well grow more efficient on the spending side), and the company, unlike a lot of the cloud software darlings, has always been profitable. Eventually we’ll judge TTD based on its earnings, but probably not until the revenue growth slows down pretty meaningfully from the current ~40% — and a share price of $90, if the analysts are correct about 2022, would give TTD a forward PE of about 100.

If you want reason for optimism, and perhaps reason to take a first nibble on a great company even if the valuation is kind of crazy, then one way to talk yourself into a buy is by thinking about TTD’s still-small size in the context of the global advertising market: The Trade Desk’s platform saw record ad spend of $4.2 billion in 2020 (TTD’s revenue is just a sliver of that, they get a tiny slice of the ad spend as a fee, but that’s how much money their customers spent on the platform). In 2020, Google had $147 billion in advertising revenue across its platforms, and the total global ad market was, according to most estimates, somewhere in the range of $600 billion. This market is almost unimaginably huge, and necessary to almost every business around the world, and The Trade Desk, crazy as it seems, is still a pretty small player in the overall world of advertising, handling less than 1% of the ad placement (mostly because programmatic advertising is still a small part of the overall global advertising world… though it is growing very fast). And the ad market is still growing, too, with all of the growth coming from areas where TTD has strength, including internet and mobile ads and streaming video (what they call ‘connected TV’), as traditional TV and older forms of media (radio, newspapers, billboards, etc.) lose share to the digital world.

The Trade Desk is priced as if it will grow, for sure, but there is room for that growth. Even if the size of the customer spend on its platform rises 500%, it would still be handling a tiny sliver of the ad buying that is done just on Alphabet’s platforms. That would likely take at least several years even if everything goes fantastically well, but it’s possible — and, in fact, it’s hard to bet against that future, which would just be the logical continuation of some well-established trends. If they reach that level of revenue at some point, let’s be optimistic and say it’s in 2025 (the current level of spending means that ad spend on TTD’s platform grew by about 500% over the past six years, so that would be a little bit of an acceleration), and imagine that they have a 25% net income margin at that point (which is lower than they had last year, at 28%, but higher than their previous years)… with those assumptions, they’d have about $1.5 billion in annual net income four years from how.

That still wouldn’t make today’s price cheap, but it puts the current $40 billion market cap [OK, that was almost a week ago… now it’s $52 billion] in some context — there’s no guarantee it will work out, but the math is clearly available for it to work out just by growing the established business to take a 3-5% market share instead of a 1% market share, it’s not a pie-in-the-sky impossibility.

So… no guarantees, for sure, but TTD is still small enough to grow. And to be volatile… it has spurred both a partial stop loss sale for me and a re-buy in just the past year, and it has generally dipped to a reasonable “buy” range in most years — though those are exactly the moments, like when I last bought shares in May, when it is hard to be excited about the stock (it had fallen almost 50% from its highs of a few months earlier)… so if “waiting for a dip” is your strategy, make sure you’re ready for the fact that it might not feel as brilliant at the time of the dip as it hopefully will in the months or years afterward.

And there is no obvious floor if the story breaks and the growth slows down dramatically for some reason. If TTD were suddenly to be revalued to trade at something like an average market multiple, like 25X trailing earnings (which is itself historically high), that would mean the shares could fall below $20, roughly an 80% loss from these levels. I don’t see a reason why that should happen, but it’s definitely not impossible.

So there you have it, dear friends — yes, programmatic advertising is growing as a part of the ad market, including still wild growth for connected TV advertising, and the ad market itself is also growing, and The Trade Desk has established a firm leadership position outside the “walled gardens” of content controlled by Facebook and Google, which gives them plenty of room to grow. They’re also continuing to lead, with their Unified ID initiative to replace cookies, their rapid expansion globally, and their independence, as they’re one of the few adtech companies to not really talk about being hurt by Apple’s privacy changes. Jeff Green is really great at telling the story of TTD, and sharing his vision, and it’s definitely worth reading the last quarterly call transcript to get his take on where he sees the business going… he might just talk you into drinking the Kool-Ade.

Unfortunately, the stock is often priced as if that growth is easy and inevitable, which doesn’t provide much margin for safety if they have a bad week or a bad quarter… or, indeed, if the market sentiment turns, and well all decide that we’re not going to chase hot stories by valuing them at 50X sales anymore.

It’s a great company, with high growth and excellent margins and still a very small market share in a huge business. TTD is one of my largest holdings, and I’m not in any rush to sell. I think the odds are pretty good that it will be in fine shape five years from now, and if you don’t own this great company I can see ample reasons to buy just a tiny stake even at inflated prices, giving yourself a chance to learn more about it and perhaps build up enough confidence to buy more when the stock hits a bad patch, as it almost certainly will at some point…. but there’s clearly a lot of risk of disappointment when you buy at historically silly valuations, and TTD is still trading at a valuation that we would have all laughed at anytime before 2019.

That’s the challenge of being an investor in this environment, with almost every popular stock trading at multiples far above those that have sounded alarm bells about a “bubble” in the past, so what do you do?

I can’t time the overall market or predict the next crash (and if I had tried in the past, I would have probably been out of the market for much of the past decade, missing out on massive gains), and the valuations are elevated almost everywhere, so I work within the world we live in today. I try to choose companies with clearly profitable strategies, large addressable markets where there’s no obvious “ceiling” on growth, and good leadership, and use a little pricing discipline to help me build long-term positions in those companies on bad days… but that’s just me, if you’ve got a strategy to follow, or another stock that you think is priced better than The Trade Desk right now, please do share with a comment below. Thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of and/or call options on The Trade Desk, Alphabet, NVIDIA and Amazon. I will not trade in any covered stock for at least three days after publication, per Stock Gusmhoe’s trading rules.