Reorganization And AI Focus Will Shape Digital Advertising Despite Challenges

Key Takeaways

• Strategic focus on agile processes and AI investments could drive innovation and revenue by enhancing productivity, targeting, and advertising outcomes.
  
• Improved client engagement through Joint Business Plans and digital supply chain initiatives could bolster future revenue and operational efficiency.
  
• Underlying execution issues, increased competition, and operational recalibration may challenge The Trade Desk's market position and revenue stability despite past successes.

Catalysts

Operates as a technology company in the United States and internationally.

• The Trade Desk reorganized its operations to provide a clearer view of roles and responsibilities, streamlined client-facing teams to reduce complexity, which could help in improving revenue as it enhances client service and delivery capabilities. This operational efficiency could support better earnings in the future.
  
• The company emphasized improving operational effectiveness and scalability, including a shift back to agile product development processes. This could lead to enhanced productivity and innovation, potentially supporting revenue growth and improving net margins through more efficient processes.
  
• Increasing focus on securing Joint Business Plans (JBPs) with brands, which grow 50% faster than other business areas, could significantly bolster future revenue as they drive impactful partnerships and deeper client engagements.
  
• A strategic pivot to enhance data-driven programmatic advertising and significant AI investments could improve revenue streams by improving targeting efficacy and advertising outcomes, subsequently optimizing net margins due to potentially lower costs and increased effectiveness.
  
• The Trade Desk’s initiatives in improving and protecting the digital advertising supply chain, including the acquisition of Sincera and advancements in OpenPath, could streamline operations, resulting in improved profit margins and operational costs, bolstering future earnings as inefficiencies are reduced.

Trade Desk Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Trade Desk compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Trade Desk's revenue will grow by 10.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 16.0% today to 12.2% in 3 years time.
• The bearish analysts expect earnings to reach $426.7 million (and earnings per share of $1.03) by about July 2028, up from $412.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 73.8x on those 2028 earnings, down from 97.4x today. This future PE is greater than the current PE for the US Media industry at 20.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.46%, as per the Simply Wall St company report.

Trade Desk Future Earnings Per Share Growth

Risks

• The Trade Desk missed its own expectations for the first time in 33 quarters, highlighting potential issues with financial forecasting and could impact investor confidence, ultimately affecting stock price due to perceived risks in revenue consistency.
  
• A series of small execution missteps in Q4 led to a shortfall, indicating challenges in operational efficiency and execution, which could lead to pressures on net margins if not rectified.
  
• Despite a record-breaking year, the failure to meet expectations in 2024 could signal potential volatility in earnings, especially if similar issues arise in the future.
  
• The significant reorganization and internal recalibration indicate underlying complexities in scaling operations, which could lead to short-term disruptions and impact revenue growth rates.
  
• Increased competition from large players like Google and Amazon, with contrasting objectivity issues, may intensify market pressures and challenge The Trade Desk's claims of premium differentiation, potentially affecting its market share and long-term revenue growth.

Valuation

• The assumed bearish price target for Trade Desk is $53.16, which represents two standard deviations below the consensus price target of $87.72. This valuation is based on what can be assumed as the expectations of Trade Desk's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $426.7 million, and it would be trading on a PE ratio of 73.8x, assuming you use a discount rate of 6.5%.
• Given the current share price of $81.67, the bearish analyst price target of $53.16 is 53.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.