Alphabet vs. The Trade Desk: Which Is a Better Buy?
Key Points
Alphabet has seen accelerating top-line growth in a difficult macroeconomic environment.
The Trade Desk issued disappointing guidance for the current quarter as its top-line momentum continues to decelerate.
One of the two stocks emerges as the clear winner in a head-to-head comparison.
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As investors look for ways to get exposure to growth trends in their portfolios, one idea is to beef it up with companies ties to not just one, but two growth areas of the market: artificial intelligence (AI) and digital advertising. Investing in Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), the online search giant, and The Trade Desk (NASDAQ: TTD), an independent digital advertising platform, are two ways to get exposure to both the ongoing shift toward digital ads and the implementation of AI into existing services.
But the recent earnings reports from these two companies revealed a stark contrast in their fundamental momentum. Alphabet continues to accelerate its top line and expand its profit margins. Meanwhile, The Trade Desk's stock has been hammered this year as its fourth quarter pointed to a further top-line growth deceleration.
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So, is this an opportunity for investors to pick up shares of the smaller digital advertising specialist, given its recent stock price decline? Or is Alphabet, despite its large size and better stock performance, still the better buy?
Image source: Getty Images.
Alphabet pairs rapid growth with diverse revenue streams
Alphabet's fourth-quarter financial results were exceptional. Revenue rose 18% year over year to $113.8 billion, accelerating from 16% growth in the previous quarter. This acceleration was driven by broad strength in Google Services revenue, including Google Search, subscriptions, and YouTube ads, as well as its booming cloud computing business.
Alphabet's cloud computing business is scaling at a staggering pace. Google Cloud saw revenue increase 48% year over year to $17.7 billion during the period. This high-margin segment is benefiting from the ongoing adoption of AI infrastructure.
"We're seeing our AI investments and infrastructure drive revenue and growth across the board," said Alphabet CEO Sundar Pichai in the company's fourth-quarter earnings release.
Alphabet also demonstrated excellent operating leverage. Sales grew 18%, while net income soared 30% year over year to $34.5 billion. That spread reflects the company's aggressive focus on cost discipline even as it funds massive infrastructure investments.
The Trade Desk faces decelerating momentum
The situation looks much different for The Trade Desk. The company reported revenue of $847 million during the period, up 14% year over year. While management noted in the company's earnings call that growth would have been closer to 19% excluding the irregular nature of U.S. political ad spending, the trajectory is still slowing compared to previous quarters.
Looking ahead, the problem is expected to worsen. Guidance for first-quarter revenue of at least $678 million implies about 10% year-over-year growth. This represents a material step-down from the revenue growth the company posted in the fourth quarter.
Additionally, management's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance was even more disappointing, as it implies a year-over-year decrease in the key profitability metric.
Still, it's worth noting that the company continues to generate substantial free cash flow and maintains a debt-free balance sheet.
Further, The Trade Desk's latest platform, Kokai, is heavily infused with AI. And The Trade Desk CEO Jeff Green said in the company's earnings call that he believes Kokai is "the most advanced AI-fueled buying platform ever pointed at the open internet."
Despite The Trade Desk's continued cash generation and the potential for AI to fuel growth, its top-line deceleration is concerning.
The winner is clear
Overall, I believe Alphabet is the better of the two stocks.
The Trade Desk trades at about 27 times earnings at the time of this writing. What about Alphabet? Despite growing much faster and having a more diversified business, it is trading at almost the same valuation. Its price-to-earnings ratio is just 28.
So, I think Alphabet is the clear winner in the debate between these two tech stocks. The search giant benefits from a highly diverse business model and also boasts a cloud computing business experiencing surging growth.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and The Trade Desk. The Motley Fool has a disclosure policy.
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