Digital Ad Spending Slowdown Does Not Affect The Trade Desk

The Trade Desk’s TTD solid fourth-quarter results support a few of our assumptions about the firm and the digital ad market, including continued strong growth of the connected TV market, that an increasing number of clients will sign multiyear agreements, ad spending will continue to shift away from “walled garden” sites or apps like Facebook, and adoption of the firm’s universal identifier offering, UID 2.0, will steadily expand.

We have slightly adjusted our projections, pushing our fair value estimate to $46 from $43. While we commend management for executing well and believe the firm remains well-positioned to gain share in the ad-tech market, we believe the stock is now overvalued as it is trading 25% higher in reaction to earnings.

Fourth-quarter revenue came in at $491 million, up 24% year over year. For the year, we were pleased with the improvement in take rate to 20.2% from 19.4%, although it remained below the prepandemic level, which we think likely reflects larger clients not having yet fully resumed programmatic ad spending. Non-GAAP operating income of $227.7 million represented a 46.4% margin, up from 45.5% last year, helped by lower variable compensation costs and the timing of various marketing campaigns.

Increased demand for advertising on connected television services drove revenue growth. We expect the connected TV market will grow at a 21% annual average rate through 2027 in the U.S. Growth in the number of longer agreements with advertisers and agencies also drove top-line growth. More clients are signing two- to three-year joint business partnership, or JBP, agreements, rather than one-year agreements. We think the firm has more opportunities to customize work for its clients that with JBPs, while clients further integrate and customize their in-house platform with The Trade Desk.