Trade Desk Earnings: Decent Quarter Hit by Large Selloff

Key Morningstar Metrics for Trade Desk

• Fair Value Estimate: $82.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Trade Desk’s Earnings

Trade Desk TTD sold off more than 30% in after-hours trading after reporting second-quarter earnings that exceeded management guidance by 2%. However, this was paired with third-quarter guidance that appears weak relative to historical precedent. Customer retention remains strong at 95%.

Why it matters: Trade Desk is back near April lows, in what seems to be a classic ad tech dynamic wherein decent quarters can still be punished if there is any hint of fear around the durability of growth. Management said connected TV, the firm’s largest segment, continues to grow rapidly.

• Nothing appears structurally wrong with the business. We believe CTV has a considerable runway for growth. Client adoption is ramping nicely for the company’s new programmatic operating system, Kokai. AI ad generation tools already exist on the platform as well.
• According to eMarketer, the spread between CTV viewership time (high) and CTV’s share of US total ad spending (low) is widening, which informs our belief that it is underutilized. We believe this spread will narrow, and this trend should disproportionately benefit Trade Desk.

The bottom line: We maintain our narrow moat rating, and we believe the shares are undervalued, trading at more than a 30% discount to our $82 fair value estimate. We view the current risk/reward profile as attractive.

• Making it easier for small-to-mid-size businesses to adopt Kokai seems like an appealing upside option, as it would expand beyond the current customer mix, which is primarily made up of large multinational companies. Trade Desk appears willing to explore this opportunity, and we encourage this.
• Should Trade Desk expand its customer mix beyond the largest companies, we expect operating margins to benefit, thanks to the low marginal cost of adding more customers relative to the marginal revenue derived. This expansion would culminate in direct competition with AppLovin.