2024-01-20 06:33:05 ET
Summary
- The Trade Desk is deemed overvalued at more than 30x forward free cash flows, with a significantly more favorable balance sheet compared to AppLovin.
- TTD's revenue growth rates are showing signs of moderation, likely stabilizing around 20% CAGR, impacting its premium valuation in the market.
- AppLovin, specializing in the mobile app ecosystem, presents more erratic growth rates and a history of uncertainty, leading to a lower market valuation despite a positive outlook.
- Despite a fair amount of debt, AppLovin's valuation at 9x forward free cash flow positions it as a potentially superior investment to TTD in 2024, emphasizing the importance of both valuations and growth rates in investment decisions.
Investment Thesis
Here I compare and contrast The Trade Desk (TTD) with AppLovin (APP). I make the case that The Trade Desk is overvalued for what it offers investors, with its stock priced at more than 30x forward free cash flows. Yes, The Trade Desk is very stable and has a very strong balance sheet, with probably more than $1.5 billion of cash on no debt when it comes to reporting its Q4 results in a few weeks.
While AppLovin carries a fair amount of debt, at approximately $2 billion of net debt, while its underlying growth rates are more unpredictable. Naturally, this means that APP should carry a lower multiple on its stock.
And yet, I contend that in 2024 APP will be a superior investment to TTD.
Rapid Recap,
At the start of November, I took a bearish outlook on The Trade Desk.
Author's work on TTD
As you can see above, since I took a bearish view, the stock has underperformed the S&P 500 ( SPY ).
Meanwhile, at roughly the same time, I took a super bullish view of AppLovin, and that stock has performed even worse than The Trade Desk, although not by much.
Author's work on APP
What we see here is that the stock in the past 3 months has also underperformed the S&P 500.
Nevertheless, as we look ahead over the next 12 months, I believe that APP will meaningfully outdistance itself from TTD. Here's why.
The Trade Desk vs AppLovin
The Trade Desk and AppLovin, both prominent players in the digital advertising landscape, diverge in their core business focuses and target audiences.
The Trade Desk positions itself as a leading independent demand-side platform, offering advertisers a comprehensive solution for programmatic advertising across diverse channels such as display, video, audio, mobile, and native. With an emphasis on transparency and data-driven decision-making, The Trade Desk caters to advertisers and agencies seeking versatile and independent advertising solutions.
In contrast, AppLovin specializes in the mobile app ecosystem, providing a mobile-centric platform for developers. AppLovin's primary clientele comprises mobile app developers and publishers, offering them tools for user acquisition, engagement, and in-app advertising solutions. While The Trade Desk maintains independence and a broader industry focus, AppLovin's specialization lies in empowering mobile app developers within the dynamic mobile app landscape.
With this context in mind, let's now turn our discussion to their respective outlooks.
TTD's Revenue Growth Rates Are Moderating
TTD revenue growth rates
Ben Graham re-quotes Horace by saying:
Many shall be restored that now are fallen and many shall fall that now are in honor.
The problem with investing is that we like to believe that there are businesses that will always be in favor, those businesses with superior management. And I put The Trade Desk on that list. And yet, the fact of the matter is that The Trade Desk's revenue growth rates are starting to moderate.
Not long ago this business could be counted on for more than 30% CAGR. Today, its revenue growth rates are likely to stabilize around 20% CAGR. And this has dramatic implications on the multiple that investors are willing to pay for the stock.
Case in point, I've stated on numerous occasions that when investing, it's not good enough to be a contrarian for a contrarian's sake. Ultimately, one needs to be a contrarian that is proven correct.
Indeed, when it comes to investing, it's a game of probabilities. Getting as many factors as possible on our side of the equation, so that there's a more than 50% likelihood that our investment works out successfully.
And for that, I've often told my readers that when investing, seek to put capital to work in stocks where the Street has a favorable outlook on your stock and the Street is out there upwards revising their consensus revenue figures.
Even as I admit that no investment strategy is perfect. After all, this is a game of probabilities. And yet, what you see in the graphic above is contrary to this line of reasoning. What we see is that with time, analysts are slowly downwards revising their revenue estimates for The Trade Desk.
Does this mean that the analyst community is right? No, it absolutely does not. But it does mean that The Trade Desk is now a ''show me'' stock . And show me stocks struggle to trade at a premium valuation.
Next, see below AppLovin's growth rates.
APP revenue growth rates
What we see above is that AppLovin's growth rates are dramatically more erratic. This will naturally impact the multiple that investors will be willing to pay for its stock.
What investors crave, above all else, is certainty. And AppLovin hasn't historically been able to provide investors with this. While The Trade Desk has provided investors with peace of mind, and that's why it's stock has always been priced at a premium valuation.
But I now believe that the pendulum has swung too far in both instances. And that's what we'll discuss next.
TTD vs APP Stock Valuation -- One is Priced at 9x Free Cash Flow
Let's compare The Trade Desk with AppLovin. For transparency, I'm long APP. But I believe that I'll nevertheless be fair in my comparison.
As you can see above, in the past 3 months, APP has not been the best performer. Yes, there's a positive return for APP, but it's far from the group leader. I hope this insight only goes to prove my argument that I'm not reverse engineering my trades to drive forward my argument.
Nonetheless, what we can see is that The Trade Desk has been the group's worst performer. And I know that it's easy to say that since it's underperformed, it must be undervalued. But again, I believe this is a fallacious argument.
I believe that The Trade Desk will make $1 billion of EBITDA in 2024. For this figure, I've assumed that The Trade Desk's EBITDA will grow by approximately 25% y/y compared with 2023.
Realistically, I don't believe that The Trade Desk will in fact deliver $1 billion of EBITDA, since it's difficult for The Trade Desk's underlying profitability to far outpace the growth in its topline. But for the sake of our discussion, I've be willing to use this figure.
This leaves The Trade Desk at 31x forward EBITDA. Incidentally, I believe that The Trade Desk's capex will be higher than $100 million in 2024, but let's assume that The Trade Desk has no capex needed in 2024, to leave room for error in my calculations.
Let's now draw a comparison with AppLovin. I anticipate that AppLovin will generate approximately $1.4 billion in EBITDA for the year 2023. To account for uncertainties, I have introduced a margin of safety into my projections, envisioning that AppLovin's EBITDA for 2024 would be approximately $1.6 billion.
While the expectation that AppLovin's free cash flow would increase by only 14% from $1.4 billion in 2023 to $1.6 billion in 2024 might seem conservative, let's proceed with this estimate. Taking capital expenditures into consideration, this projection translates to an estimated $1.5 billion in free cash flow for the year 2024, positioning APP at a valuation of 9 times its free cash flow.
It's important to note that AppLovin carries a net debt of $2.8 billion, which will impede significant acquisitions in 2024. However, assuming AppLovin sustains its robust performance and effectively integrates the acquisitions made in 2023, it is plausible that by this time next year, its net debt could decrease to below $2 billion. This reduction in debt would potentially pave the way for AppLovin to resume more substantial acquisitions.
The Bottom Line
In conclusion, as I assess The Trade Desk against AppLovin in terms of investment potential, it becomes evident that TTD is currently overvalued, trading at over 30 times forward free cash flows, despite its stability and robust balance sheet.
Notably, TTD's revenue growth rates are decelerating, leading analysts to revise their estimates downward, positioning it as a "show me" stock struggling for a premium valuation.
Conversely, AppLovin, despite shouldering a fair amount of debt, exhibits more unpredictable growth rates. The analysis points to APP, priced at just 9 times its free cash flow, as a superior investment to TTD in 2024, underscoring the importance of valuations and growth rates in evaluating these digital advertising entities.
For further details see:
The Trade Desk Vs. AppLovin: Why One Is A Much Better Stock