The Trade Desk (TTD -0.54%) has generated impressive returns since its IPO in 2016. The advertising technology company went public at $1.80 per share (on a split-adjusted basis), and its stock now trades around $45.
Therefore, a modest $1,000 investment in The Trade Desk would have blossomed to $25,000 in just over six years. But does this growth stock still have room to run over the next five years? Let's take a closer look at its growth trajectory to decide.
Image source: Getty Images.
What does The Trade Desk do?
The Trade Desk is the world's largest independent demand-side platform (DSP) for digital ads. DSPs sell advertising space for programmatic (automated) ads on desktop, mobile, and connected TV (CTV) platforms. They sit on the opposite side of the supply chain as sell-side platforms (SSPs) like Magnite (MGNI -3.30%), which help publishers sell their own ad inventories.
Digital advertising giants like Alphabet's (GOOG -1.96%) (GOOGL -1.97%) Google and Meta Platforms (META -10.56%) integrate comparable DSP and SSP services into their own advertising platforms, but they lock advertisers and publishers into their own walled gardens. This makes independent DSPs like The Trade Desk an attractive option for advertisers that want to simultaneously reach a wide range of digital platforms across the "open" internet.
The Trade Desk still faces a lot of competition from Google and Meta in the mobile and desktop markets, so it's been expanding its CTV business -- which funnels ads to ad-supported streaming media services like Disney+ -- to widen its moat. To counter Apple's (AAPL 0.52%) privacy changes on iOS, which caused many advertisers to lose access to third-party data for targeted ads, it offers Solimar, a newer AI-powered platform that collects more first-party data.
in addition, The Trade Desk has been gradually bypassing SSPs like Magnite and Google's Ad Exchange altogether with OpenPath, a platform that directly connects publishers to advertisers. This disruptive new feature could significantly expand The Trade Desk's reach beyond the DSP market and make it a more diversified ad tech company.
How rapidly is The Trade Desk growing?
Between 2016 and 2021, The Trade Desk's annual revenue increased at a compound annual growth rate (CAGR) of 43% to $1.2 billion. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew at a CAGR of 50% to $503 million, while its adjusted EBITDA margin expanded from 32% to 42%.
The company maintained those impressive growth rates even as the pandemic temporarily disrupted the advertising sector in the first half of 2020. In 2022, it expect its revenue and adjusted EBITDA to rise 32% and 30%, respectively, even as inflation, rising interest rates, and other macro headwinds force many companies to rein in their ad spending again.
During the company's latest conference call in November, CEO Jeff Green said: "It is very clear that under the current operating conditions, we are significantly outpacing the market regardless of the macro environment." In addition, Green expects the ongoing shift toward ad-supported streaming services -- as seen with Disney, Netflix, and other premium platforms -- to generate strong secular tailwinds for its CTV business. It should also drive its overseas expansion, since CTV spending in the "majority" of the company's international markets has been outpacing its domestic CTV growth over the past year.
How much upside potential does it have?
Analysts expect The Trade Desk's revenue to increase at a CAGR of 26% between 2021 and 2024 to reach $2.4 billion, even as the broader advertising market navigates tough near-term headwinds this year. They also expect its adjusted EBITDA to increase at a CAGR of 24% to $959 million.
We should be skeptical of those estimates, which could easily be derailed by a recession, but they seem conservative relative to the company's growth rates over the past six years.
If The Trade Desk hits those targets and grows its revenue at a more modest CAGR of 15% from 2024 to 2027, it could still generate $3.65 billion in revenue by the final year. That would still be 131% higher than its estimated 2022 revenue, and suggest its stock could more than double within the next five years.
The Trade Desk might not seem like a bargain at 12 times its 2023 sales and 30 times its adjusted EBITDA, but it looks a lot more reasonably valued now after shedding more than 50% of its market value over the past 12 months.
This closely watched ad tech stock probably won't replicate its massive gains from the past five years by 2028, but I believe it could still double, triple, or even quadruple in value if its core engines continue to fire on all cylinders.
