While the internet is an ever-changing and ever-expanding entity, one component of it will always remain the same -- the demand for advertising. The Trade Desk (TTD 1.62%)empowers buyers of digital advertising worldwide. Its platform offers precision targeting capability to marketers, reducing waste from ad budgets. Moreover, after setting up the ad campaign, the process is mainly automated, a win-win for The Trade Desk and marketers.
The company's stock has delivered exceptional returns to shareholders over the last five years. Indeed, the stock is up over 3,000% during that time. The melt-up in the stock price may have some investors concerned if it's too late to invest in The Trade Desk and if the stock may be too expensive to buy in 2022. Let's look closer at the business and its valuation metrics to determine if it is, in fact, too expensive.
Image source: Getty Images.
Advertisers are spending more on digital
In the nine months ended Sept. 30, 2021, The Trade Desk's revenue increased to $800.8 million, up 55% from the $516 million it reported at the same time last year. The rate of revenue growth was an acceleration from 16% in 2020.
The Trade Desk benefits from several tailwinds, but perhaps none is as potent as the shift in advertising moving to digital channels. The change is following consumers who are increasingly spending more time online. Everything from reading books and newspapers, watching TV, playing games, and communicating is happening more online. It's hard to imagine the world going without streaming services, social media apps, or online news.
Global advertising was estimated to reach $763 billion in 2021. The amount allocated to digital channels grew to 64.4%. That's up from 52.1% just two years ago in 2019.
The trend has enhanced The Trade Desk's revenue, taking it from $45 million in 2014 to $836 million in 2020. And along with that revenue growth came operating profit growth from $1 million to $144 million in that same time.
Should you buy The Trade Desk stock right now?
The growth in revenue and operating profits is impressive, and you can start to see why the stock has been up over 3,000% in the last five years. However, the rise in the stock price might be getting ahead of the operating performance.
The Trade Desk valuation metrics. Data By YCharts.
The Trade Desk sells for price to sales, price to earnings, and free cash flow levels near the higher end of the averages in its last five years (see chart). Investors interested in adding shares of The Trade Desk to their portfolios in 2022 might be prudent in waiting for the price to pull back.
Another scenario that could make the stock less expensive is if revenue, profit, and free cash flows increase while the price stays relatively flat. In that case, investors will be getting more bang for their buck.
Regardless, The Trade Desk is an excellent business riding a powerful tailwind that will not turn around. It would make a great addition to any portfolio at a more favorable price.
