The Trade Desk (TTD -1.80%), the largest independent demand-side advertising platform, has seen impressive growth over the past few years -- particularly throughout 2020. Despite the stock's appreciation, there is likely still room for this company's stock to climb higher over the long term.

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The Trade Desk advantage

The company helps brands place their ads strategically within various media forms, whether on a desktop, a connected television device, a podcast, or a mobile app. It generates revenue by taking a spread on the advertising slots that it purchases on behalf of brands that use The Trade Desk's platform. For example, if it buys ad space from a media company for $0.85, and then charges the advertiser $1.00, it keeps $0.15 in profit.

For platforms like The Trade Desk that rely on demand for ads, scale matters. The Trade Desk's size gives it cost advantages; it's already paid to build up its ad-placing platform, so it can collect more profits going forward without having to pay much to keep that platform running.A new company aiming to directly compete with The Trade Desk would have to be willing to lose a lot of money for a while to reach the scale The Trade Desk has. Also, The Trade Desk has been able to accumulate tons of valuable data on consumer demographics and preferences over its life, making it difficult for the advertisers who use it to want to switch platforms. These advantages have enabled the Trade Desk to build momentum and continue growing. 

Recent momentum

Due to the pandemic's impacts, The Trade Desk saw revenue in Q2 2020 decline compared to the same quarter in 2019.. It's highly unusual for a fast-growing software company like The Trade Desk to post declining revenue, but it showed some bright spots. Advertisers using The Trade Desk spent 40% more on Connected TV, or CTV; 15% more on mobile ads; and 20% more on audio.  Even though the Trade Desk recorded some of its lowest-ever revenue growth and advertiser spending in Q2, it still managed to keep 95% of its customers on board -- suggesting that those clients find value in The Trade Desk's services.

It took no time for the company to bounce back. In the third quarter, total revenue grew 32% year-over-year, driven by advertisers doubling the amount they spent on CTV ads, as well as increasing spending by 70% on mobile and audio. While year-end and fourth quarter results for 2020 haven't been released, management predicted that revenue will rise 33% to 35% year over year in Q4, continuing the trend seen in the third quarter of 2020. And unlike most other young software companies, The Trade Desk actually makes money. Management guided for expansion of its EBITDA margin from 36% in Q3 to at least 40% in Q4.

Catalysts for future growth

The first significant catalyst for The Trade Desk is the expected increase in CTV advertisements. COVID sped up the adoption of connected television in a major way. The Trade Desk's recent survey shows 27% of US households plan to cut cable in 2021. This stat is a strong incentive for brands to adopt advertising on CTV platforms sooner rather than later.

Another catalyst is The Trade Desk's recently announced partnership with Walmart (WMT 0.26%) to launch an expanded version of Walmart Connect, which helps brands reach Walmart customers through ads that run on its stores' TVs and checkout screens. Walmart and The Trade Desk plan to launch a one-of-a-kind demand-side platform for brands to advertise through Walmart's channels. A few quick facts show the new platform's potential reach: 90% of Americans shop at Walmart, the stores welcome 150 million weekly visitors, and there are over 170,000 TV wall and self-checkout screens. The power of The Trade Desk platform and the scale of Walmart can significantly impact both companies' revenues.

The verdict

The share price has skyrocketed more than sixfold from its low of $136 back in March 2020, while the S&P 500 is up about 41% in the same time frame. But despite that steep climb, this company could still have serious room to run.

Of course, the advertising market is very competitive with many major players in the space. But The Trade Desk operates in a $725 billion global advertising market as the leader among demand-side platforms. It does not need to take over the whole ad market to continue its impressive growth streak. Despite its risks and challenges, The Trade Desk will likely compound into a much bigger company in the long run as more advertisers turn to its platform to connect brands and people, and as it continues to forge partnerships with more places like Walmart.