Motley Fool’s “All-In” for the “Next Great Stock” (2024)

We regularly see similar ads from the Motley Fool about “all in” buy alerts, sometimes also called “double down” or “five star” buys, and they’re generally just the type of steady teaser pitch that they can send out all year, over and over with no updates, to recruit subscribers for their flagship Motley Fool Stock Advisor newsletter (almost always discounted to something in the $40-50/yr neighborhood for the first year).

But we do keep getting questions about these pitches, pretty much every week, so I think it’s worth updating my thinking from time to time — and, of course, revealing the stock for you, so you can think for yourself a bit before you pull out your credit card. Sometimes they toss in a different company as the focus of this pitch, too, with similar language, so perhaps we’ll find a surprise this time.

So what do they mean by this “All In” buy signal? Basically, it just means a stock that they like so much, they’ve recommended it more than once. Not necessarily that this second (or third, or fourth) recommendation has been made today, or this week, but, you know, sometime. After you’ve seen essentially the same promo text in these ads for three or four years, you realize that they’re not sending these ads because the stock is at a particular price or valuation, they’re sending them because the language in the ad works to bring in new subscribers. Presumably they still like the stock, and the Fool’s newsletters are not particularly valuation-sensitive anyway, they tend to find companies they like and buy and hold and re-buy, almost no matter what… but no, this is not a “favorite stock is finally at the buy price” alert.

Here’s how they put it:

“You see, twice every month, the analyst team at The Motley Fool researches a brand-new stock and recommends it to members.

“And as you’ve already seen, these picks could lead to life-changing returns.

“However, every so often, we come across a stock so good…that we just have to double down on it.

“Many of us around the office have come to call this re-recommendation an “All In” buy sign.

“And one stock in particular is simply begging for another recommendation.”

Note the specific language… if they could say, “one stock was just re-recommended,” they would say that. “Begging for another recommendation” means it’s just something that somebody over there still likes, and that language lets them re-use the text over and over.

And they claim that these “all in” re-recommendations are hugely successful, of course:

“‘Selling your winners and holding your losers is like cutting the flowers and watering the weeds,’ – Peter Lynch

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“Here at The Motley Fool, we take that same approach – add to your winners. And this isn’t some everyday occurrence.

“But the 99 times it has happened, the results have been spectacular:

“Netflix is up 6,193% since The Motley Fool went “All In” in June 2007

“Tesla, which received the “All In” buy sign in November 2012, is up 11,047% since.

“In fact, across the 101 stocks with this total conviction … the average return is an astounding 362% … crushing the S&P 500 by nearly 3x!”

(It was “nearly 4X” the last time we looked at a similar pitch, about six months ago… bull markets are way more fun).

So yes, the Motley Fool has been around for a long time, and they’ve re-recommended a lot of stocks at this point. Lots of them are no doubt doing a lot worse than they were a few months ago, but they still report that their portfolio of what must now be a few hundred stocks at Stock Advisor has beaten the market handily over time. That’s not much solace for those who just started buying these kinds of stocks in 2021, of course, most of these are “growth” stocks that are way off their highs… but at least they’re consistent, the Fool has always focused on the long term, always been willing to take their lumps in trying to find the gems, and generally tells readers that this only works if they buy at least 25 stocks and hold them for at least five years (you need a lot of time for the big winners to make up for the losers).

What’s the “under the radar” stock this time? Here are our clues:

“… the details behind this tiny little internet company are impressive:

“It’s a fraction the size of Google.

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“Each one of our previous recommendation is crushing the market….

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“This company stands to profit as more and more people ditch cable for streaming TV. And in fact, we believe this company’s crucial technology could represent the final nail in the coffin for traditional cable.”

Ah, OK, so now we can confirm that yes, this is the same stock they’ve mostly focused on with this kind of “all in” language over the past couple years. Here are a couple more clues for you, though, if you’re playing along at home:

“In an interview with Tom Gardner and his team, this company’s CEO called the current moment “the most exciting in the history of advertising.”

“Of course, any CEO could say that simply to build up hype and push the company’s stock price higher … but this CEO is putting his money where his mouth is.

“He’s betting his company on what he’s calling cable TV’s ‘ticking time bomb.'”

So yes, we don’t even have to pull the Thinkolator out of the garage to confirm that Motley Fool Stock Advisor is still teasing The Trade Desk (TTD).

And to be clear, that “most exciting time in the history of advertising” bit is not about today, specifically, not after Snap (SNAP) scared the pants off of all the advertising-related companies for the second quarter in a row because of lower advertiser demand, possible recession, inflation, war, Apple privacy changes, etc. That’s a quote from an interview Trade Desk CEO Jeff Green did with the Fool’s Tom Gardner back in December of 2017 (it’s an interesting read, you can still find it here online, but it’s a bit dated).

And I bought into The Trade Desk around the time I first saw the Fool pitching it earlier that year, so over the past five years it has become one of my larger holdings as well — I write about the company pretty often, and this year has been a little bit of a rollercoaster for TTD shares, they had a very strong first quarter but fell for the first half of the year anyway, mostly because this is a richly valued tech stock and multiples came down as caution entered the market… and then reported a pretty mediocre quarter in August but, because almost every other ad industry stock had gotten clobbered on news of weak demand from advertisers, ended up shooting higher because their “mediocre” looked pretty exciting compared to the “awful” that was expected.

Connected TV, which is what they call ads placed on streaming TV services, is still the fastest growing segment for The Trade Desk, as it has been for several years… but now it has finally ticked over to also being the largest segment, eclipsing mobile for the first time back in the first quarter as the inventory has skyrocketed from deals with big streaming platforms like Peaco*ck and Discovery+. That CTV segment was the focus of most of CEO Jeff Green’s comments on the first quarter conference call, which is worth a read (as is the second quarter, if you have a few minutes — it’s got a good rant on how happy he is that regulators are standing up to Google). Green could barely contain his glee at being right all those years ago when he predicted the advertising would become a meaningful revenue source for streaming TV, including Netflix, and he sees huge implications for bigger shifts in the business as Netflix begins to bring their massive 100+ million subscribers into the advertising world (Netflix ended up choosing Microsoft to be their primary partner in building an ad-supported subscription product, but The Trade Desk said they have a good relationship with Microsoft and expects to see the benefit of that new Netflix inventory entering the ad market).

There are big uncertainties coming in the ad business, as companies continue to figure out how to deal with Apple’s privacy changes and with Google’s move to drop support for cookies at the end of this year, but The Trade Desk is now the largest independent demand-side ad platform in the world, and they are using the weight of their huge customer base to help develop new identity solutions for both connected TV and for the open internet in general, led by their UID2 platform/standard which is attracting a lot of publishers… Jeff Green said that he thinks almost all of The Trade Desk’s customers will be using UID2 by the end of this year, which should make ongoing privacy and cookie-related changes from Google or Apple less of a factor.

There’s also still a huge amount of growth in ad spending generally, with the recovery in some categories this year providing a real bump, particularly travel, even as some widget-makers cut back on advertising because they can’t make enough widgets (which is likely to be a temporary phenomenon, recessions don’t last forever) — estimates are that digital ad spending is increasing anywhere from 8-14% or so this year, and The Trade Desk is still taking share in that business, and remains, despite their dominance, a pretty small player relative to the massive spend on platforms like Google and Facebook. I still see no obvious ceiling on potential growth from here — there is competition, TTD is far from being the only buy-side ad platform in the world… but platform companies like this experience strong network effects, they become better as they get bigger, and that typically leads to rising market share.

So the basic backdrop is a management team that has built a huge and fast-growing ad business, particularly in CTV, that is continuing to accelerate, and they continue to say hugely positive things about the massive future potential of streaming video ads… but they are also likely to have margins that drop a little bit as they spend heavily this year, and analysts are being pretty cautious with earnings forecasts as a result.

The current expectation is for earnings per share of $1 this year, which would be growth of only about 10%, much slower than the top-line revenue growth of ~30%, and those same analysts also see revenue growing by 15% in 2023 and 20% in 2024 (only a couple analysts hazard a guess going out that far). That’s well down from expectations earlier this year of 30% growth slowing to 18%.

I think that’s too pessimistic, given the huge growth The Trade Desk has shown in Connected TV advertising and the growing importance of streaming video ads, with Disney and Netflix likely to boost the inventory in that sector dramatically, and I think it’s also likely that both the company and the Wall Street analysts are being too cautious on the “rising costs” side, but that is a risk — they could be hurt more by the privacy changes at Apple and Google than I think, which could be causing analysts to be even more conservative with their TTD forecasts than they usually are, and, to state the obvious, they can be hurt by slowing economic growth as well. Advertising is surprisingly recession-resistant, since companies always need to look for new customers, but that doesn’t mean it will keep growing fast if the economy slows. It certainly fell sharply in the middle of 2020, when some sectors (like travel) stopped advertising completely for a brief while.

I’ll stick with a PEG ratio of about 2.0 to as my “preferred buy” level for The Trade Desk. We dipped to “buy” range in the low point earlier this year, then bounced back out of my range, but it’s a volatile stock and there are usually good opportunities to buy at least once or twice a year if you’re patient enough. I’ve been watching Jeff Green and this team for long enough to have some faith that they are not blowing smoke about their ability to work through the privacy challenges from Apple and Google… and their excitement about building UID2 and about continuing to build massive scale in Connected TV advertising is infectious. And I’m going to stick with my 20% long-term earnings growth expectation, which is more aggressive than analysts are being with their current forecasts — I don’t know if they’ll hit that every year, but I’m sure that revenue growth will be above 20% for the next few years, and I bet that they can average out to at least 20% annual profit growth over the next five years. That means I’m willing to pay a maximum of about 40X earnings, twice what I think is their likely growth rate, even though margins are — temporarily, I think — getting a little worse.

Being a bit cautious and using a current earnings number for that multiple would get you to $40, with the forecast of $1 in earnings for 2022 (love that easy math!)… using the 2023 estimates of $1.15 or so could get you to $46. The fourth quarter is the really big deal for TTD, since that’s such a big advertising quarter, so as we go into the Fall and the ad companies start to report and make projections in October and November, things could get a little exciting. The Trade Desk probably won’t report until the second week of November, but the expectations will be set by companies like Alphabet and Meta that will report a couple weeks earlier (and, yes, Snap… which is not really a competitor, but is sometimes taken as a bellwether for advertising stocks, at least during chaotic times when investors are looking for reasons to sell).

And, of course, this is a richly valued technology stock, trading at more than 20X sales for most of the past three years, and we’ve all seen that those kinds of stocks are volatile — particularly when interest rate expectations or growth forecasts are changing. This was never one of the “hope and a dream” tech stocks that couldn’t figure out how to make money, they’ve been profitable since before their IPO in 2016… but still, it did get up to a ludicrous valuation like a lot of those pandemic darlings, and the stock got punished when that air came out of the market. TTD was valued at over 50X sales for a little while, if you can believe that, and when the Fed freaks people out, TTD gets hit the same way other high-growth tech stocks get hit. This is one of the few stocks that I’ve said might deserve to trade at a wild valuation of up to 25X sales (nothing really deserves 50X, at least not as I imagine the future)… but that doesn’t mean the ride will be smooth.

So with your money, you get to be the one to make the call — what multiple are you willing to pay on TTD’s earnings? Since the earnings per share number is expected to come in around a dollar this year, it’s pretty easy to do the math in your head — 40X that would be $40, 30X 2022 earnings would be $30. Until expectations change next quarter, at least. See better investments that are getting similarly beaten-down? Think advertising will collapse as inflation and recession ravage the land? Let us know with a comment below… thanks for reading!

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Disclosure: Of the companies mentioned above, I own shares of The Trade Desk and Google parent Alphabet. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.