The digital advertising market is expected to expand over the next few years, reaching an estimated global size of $696 billion in 2024, up from $567 billion in 2022, according to research from Insider Intelligence.
More than a few tech companies are vying for a slice of that digital ad pie, but one company that could have an outsized opportunity to benefit from it is The Trade Desk (TTD 4.24%).
The company's online platform allows companies to buy ads for internet-connected devices -- everything from phones to connected televisions -- and the company's innovative online identifier could help revolutionize the ad space.
The Trade Desk could face some short-term headwinds, but this stock holds too much promise to ignore. Here's why.
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What's going wrong for The Trade Desk right now
The Trade Desk's stock has performed dismally lately. Amid the widespread tech sell-off, the company's share price has plummeted 46% over the past 12 months.
That's been hard to stomach for investors, but it should be put into context that the S&P 500 is down 20% over the same period, as concerns over a potential recession have grown and high inflation has caused some investors to flee the market.
Additionally, the advertising industry has experienced a slowdown as of late. Research firm Magna estimates that global advertising will grow just 5% in 2023, down from a growth of 7% in 2023, due to a "deteriorating macroeconomic outlook."
With the U.S. potentially on the verge of recession, ad spending could suffer in the short term as companies look for ways to cut back on spending. If that happens, it could slow down The Trade Desk's revenue growth and potentially hurt its ability to add new clients.
What's going right for The Trade Desk
While the slowdown in advertising is certainly something investors should keep an eye on, there's some data suggesting that it could be short-lived.
In 2009, during the Great Recession, advertising spending fell by 4.6%. But then it came back in full force in 2010, growing rapidly in just a few quarters after its initial drop.
While it's impossible to predict what will happen this time, it's very unlikely that a potential recession will be as bad as it was in 2009, which means there's reason to be optimistic that advertising can rebound this time around as well.
Additionally, investors should know that The Trade Desk is successfully navigating the industry's move away from online trackers, called cookies. The company has created its unique online identifier called Unified ID 2.0 that allows companies to still deliver relevant ads to users, without requiring the same level of tracking as cookies.
The company's system has already been widely adopted by many companies, including The Washington Post, fuboTV, and Amazon Web Services.
And finally, there's reason to be optimistic about The Trade Desk by simply looking at the company's top-line growth. In the third quarter, the company's sales increased by 31% to $395 million. Those sales came at a time when other ad-based companies saw a decline in spending, indicating that The Trade Desk can successfully weather some headwinds in the industry.
The Trade Desk is a buy
The Trade Desk's share price could be volatile over the short term, but for the reasons mentioned directly above, I think the company's opportunities outweigh its risks.
And right now, the company's price-to-sales (P/S) ratio is 14 compared to its P/S ratio of 35 this time last year. That doesn't make the company's stock cheap, but it does make it relatively cheaper than it was last year.
