- Running costs continue to soar
- Operating margins shrunk since pre-pandemic days
- Shares trading on 55 times 2024 earnings
Rapidly growing software company The Trade Desk (TTD:NASDAQ) has a big challenge ahead if it is to win back previously upbeat investor backing. The California-based company is staring market cap falls of more than $3 billion in the face this week as it struggles to convince markets that it is on track to recover its past profitability.
The Trade Desk is a multinational company that helps clients reach customers with real-time programmatic marketing automation technologies and services. These are effectively solutions that personalise digital content delivery to users, an increasingly important part of the sales channel in these digital-first times.
TIGHT GRIP ON BUDGETS
The problem is clients are increasingly reluctant to invest while their own budgets and cash flows are under strain. For example, while second quarter earnings and revenues were better than expected, they are barely a fifth of pre-pandemic levels.
Q2 2023 earnings: $0.28 versus $0.26 forecast
Q2 2019 earnings: $0.95 versus $0.68 forecast
Sure, headline growth is still rampant. Q2 2023 revenues came in at $464 million, beating expectations of $454.7 million and 190% up on 2019’s equivalent, but operating margins have collapsed. These were 22.5% in 2017 and 2018, slipping to around 17% in 2019 and 2020.
They were 9% in Q2 2023, albeit a fraction better than the 7.2% of full year 2022.
Chief executive Jeff Green remains optimistic, flagging customer retention over 95% during Q2, as it has been for the past nine consecutive years. He also talked up new opportunities. ‘With advances in areas such as CTV [connected TV], retail and identity, we are helping the world’s largest brands buy media on the open internet with more precision and transparency than ever,’ he said.
For Q3, the company expects revenue of at least $485 million, above the consensus estimate of $479.6 million, and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of approximately $185 million.
RUNNING COSTS RUNNING WILD?
But investors need to see The Trade Desk get its own running costs under control. Operating expenses rose to $422.6 million in Q2 2023, the third straight quarter of increases. These have gone from 83% of revenue in 2019 to 93% last year. They were 91% in Q2 2023.
The Trade Desk stock has fallen around 5.5% so far this week to $80.93, and they are looking at another 3% or so fall when Wall Street opens later today based on pre-market data. That implies a 2023 price to earnings multiple of 65, and 55 times 2024 forecasts
