2020 was a phenomenal year for advertising technology stocks. The Trade Desk (TTD -0.97%), the leading demand-side platform (DSP), racked up a gain of 208%, as the company wowed investors with its ability to deliver strong growth even in one of the worst advertising environments in memory.
The Trade Desk was far from the only winner, however. Magnite (MGNI -2.13%), which specializes in helping content publishers manage their inventory, known as a supply side platform, saw its share jump 276% thanks to a surge in the last two months. Shares of Roku (ROKU -0.99%), the leading streaming television platform and the owner of Dataxu, another demand-side platform that helps advertise automated campaigns, jumped to finish up 148%. Small-cap player AcuityAds (ILLM -6.30%) soared nearly 1,000%, in part from excitement around its new user-friendly DSP, illumin.
Going into 2021, investors clearly have high expectations for The Trade Desk. The growth stock now trades at a whopping price-to-sales (P/S) ratio of 49, in league with some of the priciest cloud-computing stocks on the market, and its price-to-earnings (P/E) is also steep at 169. However, 2021 looks set to be one of the best years for the business. Here's why.
The economic reopening
In all likelihood, the coronavirus pandemic will reach some sort of end this year as the vaccine rollout continues, and that means the economy will normalize. The economic reopening is likely to unleash a wave of pent-up demand in areas like travel and hospitality, restaurants, and entertainment that have been affected by the social distancing requirements during the global health crisis.
For platforms like The Trade Desk, that's likely to mean a surge in ad spending from those affected industries, as well as a desire to better target customers so these cash-strapped businesses can maximize their return on investment during a crucial time.
The Trade Desk's revenue actually declined by 13% in the second quarter as advertisers hit the pause button during the lockdown, and that comparison should also help catapult the company's growth rate next year, as it will be soon be lapping that beaten-down figure. Analysts are currently expecting top-line growth of just 33.7% for 2021, but that could prove to be overly conservative given the prospects of a recovery and easy comparisons.
The Connected TV revolution
The brightest opportunity in ad tech today is Connected TV (CTV), or ad-driven streaming television. CTV appears to be at a turning point right now, poised to disrupt linear TV, which accounts for about a quarter of the U.S. ad market. That presents a massive opportunity for The Trade Desk and its peers.
Streaming consumption has surged during the pandemic, with significant growth at platforms like Hulu, YouTube TV, and Sling TV, as well as new ad-driven services like Peacock and Discovery+ that have also jumped into the fray. Meanwhile, cord-cutting appears to be accelerating, with traditional pay-TV services losing more than 1 million subscribers in the most recent quarter, and eMarketer estimates that cable TV subscriptions declined 7.5% in 2020.
The Trade Desk's own numbers show the tremendous growth in CTV. CTV spending more than doubled on its platform in its most recent quarter. CEO Jeff Green said advertisers increasingly prefer premium TV spots over user-generated content, as they're finding it delivers better ROI and avoids some of the controversies that can come from advertising on sites like Facebook.
Part of the reason the stock surged last year is because investors believe that the pandemic has dramatically accelerated the transition to CTV, and that will drive The Trade Desk's growth in 2021 and in the coming years.
The valuation question
2020 was an anomalous year for the stock market, especially tech stocks like The Trade Desk. It's extremely rare for a stock to triple in a single year. Investors can't expect that kind of performance again in 2021, even if The Trade Desk delivers strong results, as the stock's valuation was significantly inflated last year. The market seems to already be correcting for this, as the stock has fallen more than 20% since hitting an all-time high at $972 on Dec. 22.
That's evidence that The Trade Desk shares are likely to be volatile in 2021, but the stock still looks like a strong buy over the long term. The company's high-margin business model, a new product upgrade this year called Solomar, and secular tailwinds in CTV and the economic reopening should all make 2021 a big year for the business. No matter what happens with the stock this year, those trends and the company's competitive strengths are bound to pay off over the long term.