Cathie Wood, the CEO of investment management firm Ark Invest, is a widely followed figure on Wall Street thanks to her focus on companies capable of disruptive innovation.
The firm's flagship ARK Innovation ETF has delivered a solid 28% gain year to date, and her recent moves indicate she is setting the fund up for continued success in the long run. Ark has been buying shares of The Trade Desk (TTD 1.71%), an advertising technology (adtech) provider that has climbed 70% so far in 2023.
Wood's fund purchased 88,000 shares of The Trade Desk in the second quarter of 2023. The buying has continued in the current quarter as ARK Invest's stake in the company now stands at about 170,000 shares.
This pick isn't surprising as The Trade Desk is disrupting the digital advertising industry while quickly integrating artificial intelligence (AI) tools into its offerings to ensure it can keep growing at a healthy pace.
Let's look at the reasons why this stock is built for long-term growth and capable of delivering even more upside for investors.
AI could accelerate The Trade Desk's growth
The Trade Desk's revenue in the first six months of 2023 increased 22% year over year to $847 million. Adjusted earnings jumped 24% to $0.51 per share.
While impressive at first glance, growth is actually decelerating as revenue had climbed 39% in the prior-year period. And the company's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin shrank four percentage points to 34%. Management blames this slowdown on macroeconomic factors such as inflation, the recent banking crisis, and an unpredictable economic environment that has kept advertisers from opening their wallets.
Despite these headwinds, analysts expect The Trade Desk to finish 2023 with revenue of $1.94 billion, up 23%. That would be much higher than the digital advertising market's projected growth of just 8.4% this year, according to estimates from GroupM, a media investment company. The firm notes that cooling inflation and the growing application of AI in the ad industry are likely to help increase ad spending as the year progresses, so it wouldn't be surprising to see The Trade Desk finish the year with stronger growth.
GroupM points out that AI could have a role to play in almost half of all the advertising revenue that's expected to be generated this year. That could be a huge number given that overall ad spending across the globe is expected to hit almost $875 billion in 2023. Buying The Trade Desk stock is one way to take advantage of the growing adoption of AI in advertising.
One reason The Trade Desk has been growing at a much faster pace than the industry it operates in is its ability to drive higher returns for marketers. The company provides a data-driven marketplace to advertisers and brands where they can buy ad inventory from multiple channels in real-time based on algorithms and other insights. Those tools help serve ads to the correct target audience at the right time and at the best possible price.
It's also worth noting that The Trade Desk has been employing AI to drive greater returns on advertising dollars for five years now. It's now looking to push the envelope further with a new AI-powered media buying platform known as Kokai, which was launched in June this year. The Trade Desk points out that Kokai has "access to more than 13 million advertising impressions every second," which will allow it to "help advertisers buy the right ad impressions, at the right price, to reach the target audience at the best time."
Management points out that while some of Kokai's features are already available to its customers, many more are expected to be deployed in the coming months. CEO Jeff Green added that "most of the benefits will be reaped in 2024 and 2025," which could help the company clock stronger growth than analysts are currently expecting it to deliver in the near term.
Data by YCharts.
What about the valuation?
The Trade Desk stock's year-to-date surge explains why it's trading at a rich 23 times sales. That's up substantially from the 15 times sales it logged at the end of 2022, so investors looking to buy the stock now are paying an even bigger premium for a company with slowing growth.
But The Trade Desk's forward multiples are substantially lower thanks to the solid top-line growth it's expected to deliver.
Data by YCharts.
As such, investors looking to buy a growth stock that offers exposure to AI-driven innovation in the advertising industry should consider The Trade Desk. That's likely why Ark Invest has been loading up on the stock lately.
