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SUMMARY
Parkev Tatevosian, CFA, compares Salesforce and The Trade Desk, two technology stocks currently trading well below their all-time highs. He analyzes their recent financial performance, risks, and valuations to determine which offers a better investment opportunity.
MAIN POINTS
- Salesforce and The Trade Desk have both experienced significant declines from their all-time highs and are being compared for investment potential.
- Recent revenue growth rates have slowed for both companies, with Salesforce at high single digits and The Trade Desk in the low double digits, but both expect stable or improving growth.
- Both companies improved their operating profit margins after aggressive cost-cutting in response to inflation and recession fears in 2022.
- The Trade Desk faces new competition from Amazon, while Salesforce contends with AI-driven shifts and changes in software pricing models.
- Both stocks are trading at historically low forward price-to-earnings ratios, resembling telecom valuations despite growth prospects.
- Based on valuation and personal portfolio choices, The Trade Desk is favored over Salesforce as an investment.
DETAILED ANALYSIS
Salesforce and The Trade Desk are currently among the most undervalued technology stocks, each trading well below their historical peaks. Over the past three years, both companies have seen a marked slowdown in revenue growth, with Salesforce's compounded annual growth rate dropping to 9.8% and The Trade Desk maintaining a stronger 22.4%. Looking ahead, Salesforce projects high single-digit revenue growth, while The Trade Desk expects low double-digit growth, with potential for reacceleration in the longer term.
Profitability has improved for both companies since 2022, largely due to cost-cutting measures implemented in response to soaring inflation and aggressive interest rate hikes by the U.S. Federal Reserve. These macroeconomic pressures led many technology firms, including Salesforce and The Trade Desk, to streamline operations and boost operating profit margins.
The inflection point in 2022 saw a notable increase in profitability for both firms, as they adapted to the challenging economic environment without the U.S. entering a recession.
Despite these improvements, both companies now face significant risks. The Trade Desk must contend with new competition from Amazon, which threatens its fee structure in the programmatic advertising market. Salesforce, meanwhile, faces challenges from the rise of artificial intelligence solutions and a shift in the software industry from per-seat to consumption-based pricing models.
This transition could impact Salesforce's ability to maintain previous levels of revenue and profitability as corporations increase productivity and reduce headcount.
Valuation metrics indicate that both stocks are trading at unusually low forward price-to-earnings ratios—11.7 for The Trade Desk and 12.6 for Salesforce—levels more typical of mature telecom companies than growth-oriented technology firms. Discounted cash flow analysis suggests both are undervalued, with Salesforce trading at $175 versus a calculated fair value of $291, and The Trade Desk at $21 versus a fair value of $50. Ultimately, The Trade Desk is identified as the preferred investment, with the analyst holding it in his own portfolio.
LINKS
- YouTube channel membership for exclusive perks and early access.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on evaluating publicly traded companies.
- Fiscal.ai investment research platform with a viewer discount.
- Webull investing platform sign-up with bonus shares.
- Substack newsletter subscription for monthly updates.