Alphabet's (GOOG 1.43%) (GOOGL 1.42%) Google has crushed many digital advertising platforms over the past two decades. Yet The Trade Desk (TTD 0.70%), which operates the world's largest independent demand-side platform (DSP) for digital ads, withstood that competition.
DSPs help marketers buy programmatic (automated) ad space across multiple platforms. They sit on the opposite end of the advertising supply chain as sell-side platforms (SSPs), which help publishers sell their own ad inventories.
Image source: Getty Images.
Google's advertising platform already bundles together a DSP, SSP, and other digital advertising services. But instead of going head-to-head against Google in its core desktop and mobile advertising markets, The Trade Desk has carved out a growing niche by focusing on streaming audio and video platforms.
The secular growth of those streaming media platforms, which accelerated throughout the pandemic as more people stayed at home, boosted The Trade Desk's revenue from $203 million in 2016 to $1.2 billion in 2021, which represented a CAGR (compound annual growth rate) of 43%. The Trade Desk is still tiny compared to Alphabet, but it's also growing a lot faster and attracting advertisers that don't want to tether themselves to Google's sprawling ecosystem. Could it grow significantly larger and eclipse Alphabet's market cap by the end of the decade?
The Trade Desk's long-term plan
The Trade Desk currently serves more than 1,000 customers. It provides ad space across mobile, desktop, and connected TV (CTV) platforms, but it's been generating most of its growth from the CTV market, which consists of ad-supported platforms like Comcast's Peacock, Warner Bros. Discovery's HBO Max, and Disney+. Even Netflix (NFLX -0.08%), which had shunned ads for years, plans to launch a cheaper ad-supported tier in the near future.
During The Trade Desk's latest conference call, CEO Jeff Green said Netflix's decision to avoid Google and tap Microsoft's ad tech platform Xandr (which is already partnered with The Trade Desk) to build its upcoming ad-supported tier was a "strong indication" that companies were recognizing the "dangers and limitations of walled gardens."
Google also owns YouTube, the world's largest ad-supported streaming video platform, so it doesn't make sense for most streaming video companies like Disney or Netflix to tether themselves to a major competitor. Green believes that desire to avoid walled gardens will drive the growth of an "open internet" for independent ad platforms like The Trade Desk.
Can The Trade Desk keep growing?
The Trade Desk has grown like a weed since its IPO in 2016, and its stock has more than tripled from its IPO price of $18. But besides the pandemic, which actually generated tailwinds for its CTV business, it hasn't been tested by a major recession yet. Many advertising companies have already reined in their near-term expectations to deal with inflation, rising interest rates, and unpredictable geopolitical tensions, and The Trade Desk probably won't be immune to those headwinds.
For now, analysts expect The Trade Desk's revenue to rise 33% to $1.59 billion this year, grow another 24% to $1.98 billion in 2023, and increase 27% to $2.53 billion in 2024. Those growth rates look healthy, but they might not fully account for a painful recession or intense competition from other independent or bundled DSPs.
Furthermore, Apple's (AAPL 0.51%) privacy changes on iOS and Google's decision to stamp out third-party cookies could also cause unexpected problems. However, The Trade Desk is already countering those changes with its new platform Solimar, which insulates advertisers from Apple's changes by accumulating more first-party data for ads, and a newer technology known as Unified ID (UID) 2.0 that eliminates the need for third-party cookies.
Assuming The Trade Desk matches analysts' sales expectations for the next two years and continues to grow at a CAGR of 25% through 2030, it could generate nearly $10 billion in revenue by the final year. But that would still make it an ant compared to Alphabet, which generated a whopping $257.6 billion in revenue last year. So unless Alphabet gets chopped up into tiny pieces by antitrust regulators, it will still be worth a lot more than The Trade Desk.
But it could still be a better growth stock than Alphabet
Yet The Trade Desk could still generate bigger gains than Alphabet over the next eight years. Analysts only expect Alphabet's revenue to grow in the low-teens through 2024, and it will likely maintain those mature growth rates through 2030.
With a market cap of $29.3 billion, The Trade Desk isn't cheap at 18 times this year's sales. Alphabet, which is worth $1.4 trillion, trades at five times this year's sales. But if The Trade Desk generates $10 billion in revenue in 2030 and its price-to-sales ratio cools off to ten, it could still be worth $100 billion -- which would be more than triple its current valuation. It would arguably be much more difficult for Alphabet's stock to triple within the same period.
That's all speculation for now, but I still believe The Trade Desk is a rock-solid growth stock for long-term investors. Just don't expect it to come anywhere close to matching Alphabet's market cap within the next decade.
