I’ve had a bunch of new questions about this almost evergreen Motley Fool ad for their Stock Advisor service, so I thought I’d share some answers with you here — partly because this is a stock that I write about a lot for our paying members, since it’s a substantial part of my portfolio, but I haven’t shared my thoughts on it for “free” members in a while.
So what’s the stock?
This has been pitched in the Fool’s “home run,” “ultimate buy” or “double down” alerts many times over the years — the latest ad is not dated, but makes the point that the relatively few stocks that get recommended by both of the Gardner brothers at the Motley Fool are unusually great stocks (the brothers are David and Tom, who together founded the Fool and run both the company and the flagship Motley Fool Stock Advisor). This is what they say about that “indicator”:
“It’s rare that David and Tom formally agree on the exact same stock – it’s only happened 23 times over the entire history of Motley Fool Stock Advisor.
“But when it has happened, the results have been spectacular:
“Netflix is up 11,720% since Tom agreed with David on it in June 2007
“Tesla, which received the “Home Run Buy” sign in November 2012, is up 1,243%
So what’s the latest “home run” stock?
Here are the clues, including the latest “Netflix Killer” twist they’ve added to the ad:
“… a rare and historically very profitable stock buy signal is flashing right now. Because just like they uncovered Netflix while you were still paying late fees at Blockbuster, they have found the one ‘Netflix Killer’ stock that just might give Netflix a run for its money.”
And what about some numbers?
“… neither David or Tom would ever describe this stock as a ‘sure thing,’ but the details behind this tiny little internet company are impressive:
“It’s smaller than 1/100th the size of Google.
“Each one of David’s and Tom’s recommendations of its stock is crushing the market.
Its young CEO has already banked $575 million on this stock since its IPO.”
That’s a poor choice of words, I’d say — “banked” implies that you’ve made a ton of money and put it in, well, a bank, at least metaphorically. That’s not what this “young CEO” has done, he just owns a lot of the stock because he founded the company, and has seen it increase in value dramatically as the stock has risen. He’s “betting on” the company to the extent that he hasn’t sold all those shares, but he also isn’t buying — and has, in fact, sold thousands of shares that he’s been granted by the company as compensation over the years.
What does the company do?
“This company stands to profit as more and more people ditch cable for streaming TV. And in fact, David and Tom believe this company’s crucial technology could represent the final nail in the coffin for traditional cable.
“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.
“And their intrepid CEO is betting his fortune – $575,715,640 to be exact – on what he’s calling cable TV’s ‘ticking time bomb.'”
So yes, this is, of course, good ol’ The Trade Desk (TTD).
And we’ve seen the Motley Fool recommend and re-recommend this stock many times over the past couple years, with extremely similar teaser ads touting the stock running every few months — I first nibbled on the shares back in the fall of 2017 when Tom Gardner was pitching the shares, and it was the best-performing teaser stock of 2018.
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 last week, when I was thinking out loud about the coronavirus’ real world impact on companies:
The Trade Desk (TTD) will have a similar impact to what Google will likely see 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 this 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. Either one is 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.
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 last week) 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 the past month), 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 probably consider a small nibble here after this dip if you’re interested in the five-year story.
It’s not cheap, it’s not an easy buy even at $180 or $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 week 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 even after the coronavirus collapse it also trades at more than 50X forward earnings, and the growth is widely expected to “decelerate” (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, so that probably helps with the “buy the dip” response from investors whenever things get a little less rosy… at least for now.
How about you, dear readers? Willing to gamble on a stock that’s down a lot but is still quite pricey? Let us know with a comment below.
Disclosure: Of the stocks mentioned above, I own shares of The Trade Desk and Google parent Alphabet. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules. Current positions are updated regularly in the Real Money Portfolio.