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This video was recorded on Nov. 8, 2021.
Chris Hill: [MUSIC] It's Monday, November 8th. Welcome to Market Foolery. I'm Chris Hill with me today, Jason Moser. Good to see you.
Jason Moser: Good to see you, how's everything going?
Chris Hill: It's going all right. Another busy week ahead of us. We've got the latest in the war on cash. We've got allocation strategies we're going to dig into, but we're going to start with the stock of the day. The market closed on Friday, The Trade Desk's (TTD 2.53%) market cap was 32 billion in change. As of right now, The Trade Desk market cap is north of $40 billion because third-quarter profits and revenue were higher-than-expected. I knew the digital advertising business was going well. Is it going this well, is it going? [laughs] It stopped popping 27 percent well?
Jason Moser: Well, it seems like it is. I mean, it's a better, I think, environment for some than others. Certainly, we've talked a lot recently about the advertising space and particularly how Apple's privacy changes have impacted that in the realm of social media. Companies like Twitter and Facebook and Snap. The thing with The Trade Desk is really, I think it's about the connected TV opportunity. I think that's what's so encouraging about this business, so exciting about this business. If you remember The Trade Desk, they provide demand-side platform, what's called a DSP that customers use to purchase advertising space. This is a self-service, cloud-based platform ad buyers can create, manage, optimize digital advertising campaigns that are very data-driven. It crosses formats, whether it's display, video, audio, so they really are doing a very good job. I think number one, pursuing a massive market opportunity to advertising, but also, they're doing a very good job, taking a very data-driven approach and building the tools that continue to enable that. I like to always look to see if companies are exceeding their own expectations. If we look at it just a quarter ago, last quarter, they called for revenue of at least $282 million, adjusted EBITDA of approximately $100 million. Well, did they deliver Chris? Indeed, they did, with record third-quarter revenue of $301.1 million and adjusted EBITDA of $122.7 million. It's always nice to see teams exceeding their own expectations, then it becomes the question of how or why are they doing it and I think that really falls back to this data-driven platform that they've built in this massive market opportunity in connected TV that they're pursuing.
Chris Hill: What do you say to investors out there who look at the stock and say, I get all that, but is this expensive. This is not a cheap stock?
Jason Moser: No. No, it's not. I mean, it's certainly very understandable. One thing I will say, keep in mind, this is a profitable business. This isn't one of those tech stocks that we're still waiting on that path to profitability. I mean, this is a business that actually does make money, but to your point, the valuation it's trading north of 100 times earnings, the price to sales is now in the 40-ish times range. By any metric, no, this is not traditionally a cheap stock. Now it doesn't feel like it ever has really been "Good deal or a cheap stock" and I think that goes to a number of reasons, their position in the market, the technology that they built the market opportunity that they're pursuing, and then you look at just the numbers and in customer retention remained over 95 percent during the quarter as it has for the past seven years. They have a great track record of just customer retention there. Also, we talk a lot about privacy in the way the advertising market is looking to address what is a fragmented response. We talk a lot about unified ID 2.0 or UID 2, with Trade Desk and this is their version of tackling that privacy concern while also being able to be as productive as possible with the data to continue to get more traction in buying there. They launched their new trading platform called Solimar in July, which is garnering a positive response.
I think honestly, you go back to just the way customers are spending on their platform. You look at 2020, more than 1,000 brands spent at least $100,000 on connected TV on Trade Desk's platform. Now that number, I think it's safe to say will be higher for 2021 and we'll find out soon enough. But the brand spending more than $1 million on their platform in 2020, more than doubled from the previous year. That's another key performance indicator to keep in mind, and then just again, back to the market opportunity. Particularly when you look at the video-on-demand, the ad-supported video-on-demand not just subscription video, but really the ad-supported, which it does feel that globally speaking, that's where the puck is going because it's such a compelling value proposition for so many consumers. MoffetNathanson has data out there that says that that ad-supported video-on-demand market is going to grow from $4.5 billion in 2020, about $18 billion in 2025. You take those forecasts with a grain of salt, even if you discount it, it's still very meaningful for a business that just crossed over that $1 billion revenue mark recently. Certainly seems like they are calling for continued growth here for the remainder of the year and I would think on into 2022 and beyond.
Chris Hill: Our email address is [email protected]. We got a question from Brian in Eden Prairie, Minnesota. He writes, "I'm a growth investor. I generally hold stocks for five years or more. I don't want my portfolio to turn into a mini mutual fund with 100 of my favorite stock picks, so I limit myself to 30 companies max. This also helps me be disciplined about buying and selling because in order to buy a new company, I need to believe it will outperform one of the 30 companies I already own. If it's not too personal, how many individual stocks do you each own, and why that number?" I can't believe Brian is writing such a personal question. That's just outrageous. No, I'm kidding. It's a great question, and it's an interesting approach that he's taken and you and I have both been around long enough to certainly meet with Motley Fool members at events, talk to investors in different forums, and we find people like Brian. We also find people who are looking to just buy shares of companies that they think are going to outpace the market, and if that number gets upwards of 100, so be it.
Jason Moser: Brian, that is very personal. I mean, at least buy me dinner first before we take this to the next level, I guess.
Chris Hill: Your road trip out to Minnesota and he'll buy you a coffee.
Jason Moser: Hey, we had a full event out there. I thought that was really a lot of fun. I think I'd definitely get back to Minnesota in a heartbeat. Remember that baseball game we went to out there?
Chris Hill: I didn't get to go on that trip, but thanks for bringing that up.
Jason Moser: You weren't there. That's too bad. That's too bad. Well, I'd say maybe we'll get a chance to do it again, it's feeling like that ain't going to happen. Back to the question. I like this question a lot. I think it's really good because the point is well taken, you don't want to build up this portfolio with 100-plus positions, and all of a sudden now you feel like this little version of a mutual fund. That's a reasonable concern. Now, everybody has got to figure out their own line and personally, I have always felt a little bit more comfortable running a concentrated portfolio. I think a lot of that is just based on what I do for a living. I feel like I know this stuff pretty well. It's just not something that is bothering me as much now. With that said, I went through and counted this up. Today, I have 35 separate positions in 34 different companies, and the variance there is because of Under Armour. I have those two classes of shares for Under Armour. But I have a total of 35 positions, 34 different companies that does not include my ownership in the Motley Fool. We as employees of The Motley Fool are also shareholders of the Motley Fool. You can add that to the mix, but it's different.
It's not a publicly traded company. To me, actually, 35 is a little high. The reason why it's gotten to that point recently is just because I found some businesses that I really like that I had long wanted to own and finally found some opportunities to invest in them, so I did it. I feel like if you can keep it somewhere in that 30 to 50 range, that to me seems most reasonable. I think the more sleep you are losing at night, the more you need to increase that holding level. But I think anywhere in that 30 to 50 range is nice. I try not to be too hard and fast with it. Again, I mean, not that long ago where I think it was probably a 28 or 29, but recently there just some exciting businesses that I wanted to follow and be part of and so I added positions and that's OK, but I typically view it anywhere between that 30 and 50, and I like at least that you're deliberating it. It makes you be even more picky and really put these things under the microscope and make sure you understand what you're buying before you do buy it. Because that's the correct view, is taking that five-plus year time horizon to really give those Holdings a chance to grow and do their thing.
Chris Hill: Yeah, the mindset that Brian has is fantastic. I also counted up my own individual stock holdings. I have 60 but the concentration is really in about 30. The reason I succeed is due to inheriting shares, a couple of shares of a bunch of different companies. For me, it's like you, Jason, I don't have a hardened fastened number. For me, it's more along the lines of what is my bandwidth for following these companies. I sleep better at night, knowing the companies that I own, keeping tabs on them. At some point and I don't know what that point is. At some point, the number just gets to be too much. That's why for me it's really in that 30 to 50 range.
Jason Moser: It can get to be too much. I think some folks will view that and they just don't feel comfortable not knowing what they own. I think that's very reasonable. If you're looking through your portfolio and you say, "I forget I even own that," everybody is going to feel a little bit differently, I guess, about that. Some people look at that and they think, "Well, that's just great. I'm taking my mind and devoting my energy toward other things." The whole reason you diversify is, you don't have to sit there and hem and haw over every individual holding. But yeah, I like the way you think about it.
Chris Hill: After the closing bell today, PayPal (PYPL 1.75%) is going to issue its third-quarter report. What are you going to be looking for?
Jason Moser: Well, so far this has not been that great of a year for PayPal the stock. If you look at the stock's performance, I think the stock is essentially flat with the market up something like 25 percent. I would not consider that an issue for the business though. I think that this is a company that's at the vanguard of Fintech. It's very easy to let your mind wonder because it's gotten so big, so fast and they are all these smaller, need ideas that they're just coming to market, but really PayPal remains one that is blazing the trail. A couple of things to keep in mind. The key performance indicators for a business like this total payment volume, of course, just getting an idea of the dollars that are flowing through that network. They're calling for $1.25 trillion in payment volume this year, Chris. Maybe even more which is just phenomenal to think of. If you look at a company like Square, I think they are around $125 billion. It goes to show you not only how much bigger PayPal is at this point, but it also speaks to the opportunity that's out there for a company like Square to capture. I think that's encouraging. Total transactions, always a good indicator of engagement people using the app. I think one thing we're hearing more and more about is the super app. They mentioned it seven times in last quarter's call, it's an area of immense focus for them as they start to roll this out.
The idea basically is to have just this one-stop-shop where people can get all of their financial house in order. I think that's neat to think about from a big picture perspective. I wonder how that will work because they are talking about something like 25 new capabilities that they're putting into the super app. Given that they've got PayPal and Venmo and Xoom, those are three very easy ways to move money around the world and adding ancillary services to those platforms, I think could be very valuable over time. Then speaking of Venmo, obviously, you want to pay attention to Venmo as a part of that total payment volume. I think they brought in $58 billion in total payment volume for the overall business last quarter and Venmo revenue grew 70 percent. Then I think the only other thing to meet it's interesting, at least just from a storyline perspective, is just the Buy Now Pay Later space. Because PayPal has made, I think, some pretty strong investments in this line that are paying off. Since they launched their buy now pay later feature, they've processed over $3.5 billion in total payment volume and more than $1.5 billion of that came in the second quarter alone. They have merchants who are buying in. It is now launched in Australia, fully deployed, which I think is noteworthy just because Square obviously paid a king's ransom to get After-pay under its wing. Interesting to see the competitive jockeying there in the Buy Now Pay Later space. It'd be interesting. I'm sure there are going to be some questions on the call about Pinterest.
Chris Hill: I would think so.
Jason Moser: For the last several weeks there's this rumor either about Pinterest and I can see the puts and takes for that deal happening or not happening. Anything the management has there I think would just be fun to learn more about. But you look at the stock today, they are forecasting around $4.70 in earnings per share for the year, which puts shares around 50 times. I wouldn't call that cheap, but again, you look at PayPal much like a Trade Desk, this is a business that really is blazing the trail on its space and the market tends to pick up for those types of businesses.
Chris Hill: It's not a cheap stock, but if they want to look like a cheap stock, they can go hang out with The Trade Desk.
Jason Moser: Well, that's why we got them on the same show.
Chris Hill: Exactly. Jason Moser, great talking to you. Thanks for being here.
Jason Moser: Thank you.
Chris Hill: As always, people on the program may have interest in the stocks they talked about and the Motley Fool may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show's mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.
