TTD Stock: It Has More Gas in the Tank Despite Frothy Valuation 

On July 14, I wrote a seven-stock gallery piece about companies I thought would do well in the second half of 2021. Included on my list was The Trade Desk (NASDAQ:TTD) and TTD stock.

Source: Tada Images / Shutterstock.com

 

One of the reasons I mentioned including TTD on my list was its seven-year streak of keeping its customer retention rate above 95%. But that’s not the only attractive quality. 

Here are five more that jump out at me.

 

A 10-for-1 TTD Stock Split

According to Fidelity Investments, there was four stock splits in June. TTD was one of them. It split its stock on a 10-for-1 basis on June 17.

Funnily enough, there was a second 10-for-1 split in June. CoStar Group (NASDAQ:CSGP), a leading commercial real estate information and data provider, split its shares on June 28. The two other stock splits were Neogen (NASDAQ:NEO). It went 2-for-1 on June 7. CSX  (NASDAQ:CSX) split on a 3-for-1 basis on June 29.

I mention The Trade Desk’s stock split because it’s an indication of management confidence. In late May, Bloomberg published an article about stock splits making a comeback. The article noted that Nvidia’s (NASDAQ:NVDA) 4-for-1 split was the eighth S&P 500 company to do so in the past year. 

“A lot of investing is driven by psychology,” Kevin Walkush, a portfolio manager with Jensen Investment Management, told Bloomberg. “Now, rather than a retail investor facing the challenge of buying a fractional share, a stock split means they can buy it outright. It just opens up the market that much more for retail investors.”

No one knows this more than Neil Macneale, the creator of the 2 for 1 Index, a collection of 25-30 equal-weighted stocks that have carried out a recent split. Over the past 24 years, the index has achieved an annualized return of 12.49%.

So, if you invested $10,000 in the index at the index’s inception, today you’d have $168,552. 

If you believe in the power of stock splits, as I do, and Neil really does, you’ll want to own TTD for the long haul. 

It Went Public for $18

To begin my research for this article, I looked at TTD’s initial public offering (IPO) prospectus. It sold 4.67 million shares on Sep. 20, 2016, at $18 a share

Currently trading at $71.75 as I write this, I thought for a minute that I’d made a mistake in my gallery article suggesting TTD stock had gained 2,100% since its IPO. However, anyone with a little math skill can quickly calculate that appreciating from $18 to $71.75 is not a 2,100% gain.

Ah, but there’s that split from the previous section. Based on the 10-for-1, the actual appreciation calculation should use $1.80 or 1/10th of the IPO price.  The actual compound annual growth rate since its IPO is 117.3%. So a $10,000 investment in its IPO is today worth $399,056.

No wonder founder and Chief Executive Officer Jeff Green’s 46.2 million shares (post-split) are worth $3.3 billion. 

The reality is that when The Trade Desk went public in 2016, it had $113.8 million in sales and an operating profit of $38.0 million. In fiscal 2020, it had sales of $836 million and an operating profit of $144.2 million. 

Less than five years later, it makes more operating profits than it did in sales in 2015. More importantly, it’s still growing at a brisk pace. In Q1 2021, its sales grew 37% year-over-year. In terms of adjusted income, its profits grew by 61%. 

Financially, TTD has never been stronger. It finished the first quarter with a trailing 12-month net cash position of $400 million

The Bottom Line

On July 7, The Trade Desk announced the launch of TD7, the company’s internal venture capital arm. The name is derived from the $7 million in venture capital TTD originally required to become profitable. 

TD7 is looking for tech innovators. It’s already found its first investment in Chalice, a company that’s working on new ways to utilize algorithmic ad buying. Shareholders can look forward to learning about Chalice’s progress in the weeks and months ahead. 

However, by almost every valuation metric, TTD stock isn’t cheap. Currently trading at 40.6x sales and 85x cash flow, you will have to be patient if you buy at these prices. 

But buy, you should, putting aside a little cash in case it falls below $60 as it did in May.  

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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