The Motley Fool loves to use terms like “double down” and “triple down” in its ads for some reason, and this latest one basically extends a previous Motley Fool US pitch to Motley Fool Canada… but I’ll cover it quickly for you because the questions do pile up about these ideas. The pitch is in an ad for Iain Butler’s Motley Fool Stock Advisor Canada (“on sale” for $99, aims to recommend one US and one Canadian stock each month).
The Fool has often used the “double down” term to refer to stocks that have been selected by both of the Gardner brothers — so if Tom Gardner initially recommended Netflix (NFLX), for example, and David picked it a couple years later that’s a “double down” signal that the stock is unusually appealing. Here’s what the new ad from Motley Fool Canada says in adding Iain Butler to that pair…
“David and Tom Gardner and myself independently research and pick our own stocks – what David and Tom pick has nothing to do with each other, and the same goes for my picks – they’re completely independent of Tom and David’s research.
“However, every so often the three of us all land on the exact same stock.
“Many of our colleagues at The Motley Fool have come to call this uncommon occurrence the ‘Triple Down’ buy sign.
“It’s rare that all three of us formally agree on the exact same stock, but when it has happened, the results have been spectacular”
The big one there is Shopify (SHOP), which was still a tiny and largely unknown Canadian tech company when Motley Fool Canada recommended it at about the same time that David Gardner picked it for his Rule Breakers service, in the Spring or Summer of 2016 (it’s up more than 2,000% since then — and yes, I can verify that because we covered their teaser ads for the stock at the time, Motley Fool Canada teased it a month or so before David Gardner did), but the ad also references MercadoLibre (MELI), which Butler says he joined the US-based Fool brothers in recommending in January of 2014 (that has been a Fool pick from David Gardner for much longer — if memory serves, he recommended it before the 2008 financial crisis).
So what’s this latest one?
“… none of us would ever describe this new ‘Triple Down’ stock as a ‘sure thing,’ but the details behind this tiny little internet company are undeniably impressive:
• It’s smaller than 1/100th the size of Google’s market cap.
• Each one of our recommendations of its stock are crushing the market.
• Its young CEO has already stockpiled $575 million since its IPO.
“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.”Are you getting our free Daily Update
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Sound a little familiar? How about if we add this clue:
“… this company sits in the middle of the advertising market, which is more than 10X bigger than the online streaming industry.”
Got it? If not, you’re probably pretty new to Stock Gumshoe — we’ve covered this one and the Motley Fool’s teasers about it at least half a dozen times in the past few years. How about one more clue?
“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.’
“Of course, any CEO could say that simply to build up hype and push the company’s stock price higher … but 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 our old friend The Trade Desk (TTD), which I’ve also owned for a couple years now and first learned about because of a teaser pitch from the Fool in October of 2017.
And it so happens that we covered a “Netflix Killer” pitch from the US Motley Fool folks about this same stock last month, so I’ll re-share (with updates) some of what I wrote then….
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).
They’re not really a “Netflix killer,” except in that their offerings in streaming ads might help to build ad-supported streaming services that could pressure Netflix (like the free version of Hulu, for example), and they’re not a publisher, they provide software and services to the “buy” side of the advertising market. 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 the Fool started pitching them, and since I started covering (and owning) the stock, though there have also been some meaningful dips along the way — I haven’t added to my position in a long time and have taken some profits along the way, but it’s still a top ten holding in my Real Money Portfolio and I still like the company’s long-term potential.
Here’s what I wrote about this company to the Irregulars in my Friday File in late March, when we were near the worst days in the market and I was thinking out loud about the coronavirus’ real world impact on companies:
The Trade Desk (TTD) will feel a similar impact to Google in real-world terms — travel and entertainment advertising will dry up for a little while, and that’s a substantial part of their business. At the same time, video streaming is experiencing its ultimate test at this moment, with internet traffic surging so much from the stay-at-homes and their Netflix and Hulu and Disney+ binging that the inventory available to TTD’s advertisers will also surge (personalized streaming ads means they’re buying impressions, not just buying up available airtime like with traditional TV advertising, so the market grows the more people watch ad-supported streaming).
TTD got to some pretty frightening valuations for a little while, and I did take a little profit in early February that cushions the blow of the recent collapse, so because of that earlier sale I’ve been willing to hold through the decline despite the fact that the stop loss was triggered around $180 or so, and that’s entirely because I think they’re likely to be stronger still operationally next year… and while the loss of travel advertising will hurt for perhaps a couple quarters, I expect that in the short term the increased use of mobile and streaming video in the interim, with advertisers like streaming companies and video game publishers willing to spend heavily, will help cushion any temporary decline.
The risk is more to TTD’s share price from the panic than it is to the real business, and that’s fair because the valuation got wild with all the other cloud stocks surging. TTD’s business hasn’t really changed, it’s just that investors drove the valuation up to 22X sales throughout most of 2019 and into this year, and now they’re selling what they can sell, and that means TTD at the moment is only “worth” 10-15X sales to those investors (it has recovered much of that March drop, so is at 19X sales again). Any valuation in that area means you’re dealing with a pretty ridiculous number in the abstract, but for the growth TTD has shown and has the potential to keep showing, particularly as they’ve been consistently profitable and don’t require outside capital, I’m fine with some valuation in the middle of that range. I won’t be buying more anytime soon because the position is already quite big, and the risk remains substantial (TTD could fall to $100 without the valuation being objectively “cheap” by the standards of many careful investors), but I will continue to hold (and I did pick up some long-term LEAP options a couple weeks ago).
Being worthy of this 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 (like Rubicon and Telaria, which I wrote about in February) 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 think they’ve got the pole position in their marketplace right now, but that’s no guarantee of winning, particularly in what is still early days for programmatic advertising.
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.
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, and it dropped by 50% from peak to trough in March), but for me this has been a hold simply because it is already such a large part of my portfolio… if I did not own any shares, I’d consider the recent weakness an opportunity to nibble.
Jeff Green, by the way, is the founder and the guy who the Fool often says has “bet $500 million” or, in this particular ad, “betting his fortune – $575,715,640 to be exact” on this company… but that’s an odd way to put it. He has his fortune almost entirely because he started the company, so he started with a large equity stake in The Trade Desk when the company was born, and has added to that by earning millions of dollars worth of options in TTD shares each year. He sells stock very regularly, though he gets so many options that he is also still seeing his stake grow over time — so yes, he does have his fortune largely in TTD shares still, but it’s not like he’s buying the stock today, or betting on a particular price. In addition to still having a lot of stock options outstanding, with millions more added each year as part of his CEO compensation, from the latest SEC filing it looks like he owns about 3.8 million shares today — which should actually be worth roughly a billion dollars with a $260ish share price. He owns both Class A shares and the supervoting Class B shares that give him more voting control, so I’d have to dig deeper to get a real count… suffice to say that he’s not going to be hurting no matter what happens to TTD stock in the next few years, but he certainly does have “skin in the game” as a large shareholder… and that’s important even if he’s not actually buying shares.
The stock is not cheap, so for most cautious investors it’s not an easy buy even at $200, let alone the $300+ price they hit at the February peak, 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.”
If you’d like to read some more Fool opinion on this, they posted a free article last month about the potential of streaming and the reason why that’s a possible catalyst for The Trade Desk this year, with connected TV advertising spend expected to at least double again in 2020.
Whether it will work out for the stock in the near term, well, we’ll see — I give this one a lot of rope, but it also trades at more than 60X forward (2021) earnings, and the growth was widely expected to “decelerate” even before any impact on the advertising market from the coronavirus (they’re still seen as doubling revenue from 2019-2022, but spending heavily and not quite doubling earnings in that time), so there’s not a lot of cushion there for panicked investors to count on. 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, and now you can add Stock Advisor Canada to that list, so that probably helps with the “buy the dip” response from investors whenever things get a little less rosy… at least for now.
I’d expect lots of volatility in ad industry names like TTD as advertising bellwether Alphabet (GOOG) reports this week, along with Facebook (FB) and ad agency Publicis (PUBGY), and we already got our first indication of the ad market impact of the “Great Cessation” when SNAP reported last week (I mentioned that in the latest Friday File), so even though TTD itself probably won’t report for a couple weeks (May 8 is the expected date, but I don’t think it’s been confirmed by the company yet), don’t be surprised if the stock moves a lot without any company-specific news in the next week or two.
And that’s all I’ve got for you on this one… I know a lot of you are TTD shareholders, so if you’ve got a comment to share, or an opinion on where things will go for them this year, feel free to toss it into the friendly little comment box below. Thanks for reading!
Disclosure: I own shares of and/or call options on The Trade Desk and Google parent Alphabet among the companies mentioned above. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.