Last week, Senators Bernie Sanders and Angus King introduced a bill aimed at banning advertising of prescription drugs to consumers on platforms ranging from TV to social media.
Though ubiquitous in the US, the practice of advertising drugs to consumers is banned in most other high-income countries. The bill introduced by Sanders and King would bring the US into line with practices across the developed world but would also disrupt a fundamental facet of the pharmaceutical market in the US.
Although the bill could send shockwaves through both the pharmaceutical and legacy advertising industries if passed, one possible beneficiary could be an innovative programmatic ad business called The Trade Desk (NASDAQ:TTD).
Let’s look at how TTD could be the winner in a pharma ad ban and whether or not the stock looks like an attractive buy today.
What Stock Goes Up If Pharma Ads Banned?
While TTD would be bound by the same restrictions on advertising pharmaceuticals to consumers if the bill went through, its innovative, AI-driven approach to serving ads online could help it weather the storm and emerge as a dominant player in the advertising space.
To say the least, a ban on pharmaceutical ads would be a huge blow to traditional advertising on radio, television and other forms of popular media. Nearly a quarter of the ad minutes sold on evening news programs on major TV networks, for instance, are bought up by drug companies. The removal of pharmaceutical ads could massively disrupt legacy advertising, leaving the entire industry even more exposed to innovative disruption than it already is.
TTD is set apart from most other ad businesses by its demand-side platform, which uses data to target ad audiences and AI to optimize campaigns on an ongoing basis.
In the event of a ban that would eliminate a huge portion of the ad mix on legacy advertising platforms, TTD could be in a unique position to step in as a new go-to advertising solution for businesses of all kinds.
Of particular note is the fact that TTD is quickly becoming widely used as a platform for delivering targeted ads on connected TVs. With legacy TV advertising potentially facing an existential crisis if pharmaceutical ad revenues dried up all at once, CTV advertising could draw a much wider range of brands.
The Trade Desk is already in a good spot in this space and likely to see significant gains as legacy advertising retreated in favor of the kind of programmatic advertising TTD specializes in.
How Likely Is a Ban to Go Through?
Although a ban on pharmaceutical ads could shake up the advertising industry, investors may not want to hold their breath on one going through anytime soon.
The two senators who proposed the ban are the Senate’s only two sitting independents. While Bernie Sanders does have a significant amount of influence within the Democratic Party despite his lack of formal affiliation, the Democrats are currently the minority party in both houses of Congress. As such, the measure will have to attract bipartisan support in order to pass.
While HHS Secretary Robert F. Kennedy Jr. has voiced support for measures to curtail DTC advertising in the pharmaceutical industry, the bill likely faces an uphill road to passage.
The pharmaceutical industry may also be able to challenge the measure in court, presenting yet another barrier to actual implementation even if the bill moves through Congress and is signed into law.
Is TTD Still Worth Buying Without a Pharma Ad Ban?
Given that a pharmaceutical ad ban seems like a fairly remote possibility at the moment, the next question to ask is whether The Trade Desk is attractive in its own right as opposed to just as a play on speculative changes in the ad industry.
A first glance may make the stock look overvalued, as TTD trades at 13.3x sales and 82.9x earnings. Even so, analysts appear to see value in the stock, as the consensus price target of $86.35 is 27% above the last closing price.
These valuation figures become a bit easier to stomach, however, when one considers the high rate of growth The Trade Desk has achieved by creating a highly successful data-driven platform for omnichannel ad delivery.
Taking Q1’s results as an example, TTD achieved 25% year-over-year revenue growth to a quarterly total of $616 million. Net income similarly skyrocketed from $32 million in the year-ago quarter to $51 million. TTD also has an impressive 11-year track record of customer retention rates of over 95 percent.
Speaking of track records, TTD is currently sitting on a 19-quarter streak of revenue growth and a 7-quarter streak of earnings increases. More importantly, though, analysts expect the business to keep growing at a very respectable rate going forward. Earnings per share are expected to keep rising at an annualized rate of more than 26% through the next 3-5 years, potentially going a long way toward justifying the stock’s valuation.
TTD is even taking a step that’s somewhat unusual for a high-growth tech business by allocating capital to share buybacks. In Q1, management bought back $386 million of TTD shares.
Another $631 million in buyback authorization remains, leaving management room to keep returning cash to shareholders. On the balance sheet side, it’s also worth noting that The Trade Desk has a reserve of over $1.1 billion in cash and cash equivalents and no long-term debt.
There’s little doubt that TTD trades at a large premium, but its performance could make its valuation a worthwhile risk. With ongoing buybacks, strong revenue growth, existing profitability and an increasingly central position in a growing market, there’s quite a lot to like about TTD at the moment.
For investors who are comfortable with a decent amount of risk in exchange for potentially outsized gains, TTD is a good play on the ongoing growth of targeted online advertising with or without a government ban on pharmaceutical advertising undermining its legacy competition.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.