Is The Trade Desk a Strong Buy After Its Tremendous Recent Results?

Technology is changing everything -- including advertising. Today, algorithms increasingly control advertising sales in the digital world. This is especially true for ads that appear on streaming services, websites, and apps.

It works like this. An advertiser contracts with a demand-side platform (DSP) to create a campaign, specifying budgets, goals, and target audiences. Then, when viewers are streaming something or visiting a website with available ad space, this is communicated to the DSP. The DSP then bids on the space in real-time on behalf of the advertiser, and places ads in front of the viewer. This process happens so quickly that we aren't even aware of it.

This all improves the efficiency of digital advertising by targeting specific audiences, accessing a larger marketplace, and using data to adjust campaigns. Many believe all advertising sales will eventually be transacted digitally, giving DSP companies like The Trade Desk (NASDAQ: TTD) a leg up in a massive addressable market that's expected to expand significantly for the foreseeable future.

Impressive results

Perhaps the easiest way to visualize The Trade Desk's recent success is to chart its rapid rise in revenue.

TTD Revenue (TTM) data by YCharts.

The company's sales grew by 27% to $628 million in Q3 and management forecasts $756 million in the current quarter. Connected television devices such as smart TVs, Roku, and Amazon Fire TV, drive much of its revenue, enabling The Trade Desk to partner with the most popular streaming services. The Trade Desk reaches 120 million connected TV devices, so it's no wonder advertisers choose to use the platform and that The Trade Desk has a 95% customer retention rate.

The Trade Desk also generates tons of free cash flow, is profitable, and has a strong balance sheet. Over the past 12 months, it brought in $520 million of free cash flow (FCF) and $0.61 in diluted earnings per share, with a robust FCF margin of 22.5%. The balance sheet features $4.8 billion in current assets against just $2.6 billion in current liabilities, meaning it has a solid working capital of $2.2 billion.

Is The Trade Desk stock a buy?

The company is in excellent financial shape, allowing it to fund its growth initiatives such as international expansions. Only 11% of The Trade Desk's sales are outside North America; however, 67% of the total money spent globally on advertising is spent in foreign markets. This is a gigantic, under-tapped market for The Trade Desk. Its international sales haven't blossomed yet, so management needs to prove that it can drive these sales.

The Trade Desk has several deep-pocketed competitors like Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Microsoft (NASDAQ: MSFT), but its results have been excellent despite that. It helps that the digital advertising market is vast and growing.

With the market near its all-time high, relatively few stocks are inexpensive now, and The Trade Desk is not one of them. It trades at over 28 times sales at the time of this writing.

TTD PS Ratio data by YCharts.

This is well above its all-time average, although it's a far lower ratio than it carried during the tech bubble of 2021. Still, this is a steep valuation.

If you want to buy in, though, there are strategies that can mitigate the risk of overpaying. Dollar-cost averaging -- buying shares on a regular schedule over time regardless of their price -- is one credible approach. Another tactic to consider is waiting for a pullback and then buying the dip. The bottom line: The Trade Desk is a terrific company, but its premium valuation means investors should consider strategies to limit their risk of overpaying for its stock.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bradley Guichard has positions in The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, and The Trade Desk. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.