The Trade Desk (NASDAQ:TTD) provides a platform for advertisers and their agencies to make programmatic media buys, track campaigns, and use data to optimize digital advertising. The company operates on the demand side of the industry, and its omnichannel offerings include video, social media, display, and connected television (CTV). The Trade Desk has been public since September of 2016.

Advertising is changing. Cable and satellite television have been in decline for years. Only a little over half of the United States population has cable television subscriptions these days. That figure drops dramatically for those under age 49. And of those adults under age 29, who are a key target demographic, only about a third get their television through cable or satellite. Connected television, that which is viewed using an internet connection, is on the rise . Other digital advertising mediums like video and social are also gaining market share . Advertisers and their agencies need access to this media in order to target their primary audiences.

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The Trade Desk provides this access through their programmatic digital advertising platform. While traditional advertising is inefficient and only loosely targeted, digital advertising with The Trade Desk is efficient, targeted, and data-driven. The company reports that it currently has access to over 87 million households and 120 million devices in the United States. The recent announcement of an expanding partnership with NBCU's Peacock CTV service will create additional opportunities. 

Television is going through a generational shift from linear to digital, accelerated by the global pandemic, and Peacock has been a case study in how broadcast leaders are adapting and leading in this new normal. CTV is one of the industry's fastest-growing channels because marketers get to apply data-driven precision to their massive TV campaigns for the first time. The addition of Peacock to our CTV advertising options represents the kind of premium content, at scale, that our clients are demanding." -Tim Sims, Chief Revenue Officer, The Trade Desk.

Explosive growth and an untapped international market

The Trade Desk's revenue has made a meteoric rise over the last several years. Since 2017, the revenue has grown at a compound annual growth rate (CAGR) of over 40%. This is despite a slowdown in advertising spending during 2020 due to the pandemic . As pictured below, revenues have risen from $308 million in 2017 to over $1.1 billion in 2021 using management's fourth-quarter guidance. The CAGR for 2021 is again above 40%, showing the company's resiliency.

Chart showing rising revenues from 2017 through 2021.

Source: The Trade Desk

The Trade Desk is also profitable, which is somewhat rare among high-growth tech companies. The company has posted $256 million in operating profits over the trailing twelve months (TTMs). The SaaS Rule of 40 is a metric commonly used to measure a growing company's growth and profitability. If a company's growth and profit margin percentages add up to more than 40, it is generally viewed as worthy of investment. The Trade Desk has a Rule of 40 value greater than 65 using the 2021 guided growth and TTM profit margin. This is excellent news for investors. 

The company is spending a lot of money to achieve this growth and doing it efficiently. The SaaS Magic Number measures the efficiency of sales and marketing spending in terms of gains in overall revenue. A metric over 0.75 is generally considered to be efficient and indicates that the money spent is well worth it in the long run. The Trade Desk posted a highly impressive Magic Number well over 1.25 as of the last quarter. With the total advertising market approaching $1 trillion globally, this efficiency will power growth.

The international market is relatively untapped for The Trade Desk, and management has expressed an interest in pushing the brand into these markets. As of the latest report, less than 15% of billings were for areas outside of the United States. This represents a massive opportunity to expand.

The valuation is concerning in the short-term

The Trade Desk stock has risen over 35% over the last month after having been down slightly for most of the year. This has pushed the forward PS ratio over 43. High-quality transformative companies typically don't come cheap, and The Trade Desk is no exception. The PS ratio falls to just over 33 on a forward one-year basis, as shown below. These metrics mean the stock may be quite volatile in the short term and would likely fall more than the overall market in the event of a broad downturn.

Chart showing the Trade Desk's stock price, forward PS ratio, and forward 1 year PS ratio.

Source: YCHARTS

The Ruling

The way in which people receive media is changing, and this has spurred a fundamental shift in the way advertisers and their agencies reach their target audiences. Video, display, and CTV advertising is the future, and The Trade Desk is the best-in-breed stock in the sector. Revenue growth is dazzling, and the SaaS metrics indicate an efficient management team. While the stock may be bumpy in the short term, The Trade Desk is poised to be a long-term market out-performer. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.