Economic headwinds have hammered the digital ad industry. Outsized inflation has caused consumers to pull back on discretionary purchases, causing brands to reduce their ad budgets to compensate for softening demand. As a result, many ad-based businesses reported weak growth over the past year, and their stocks suffered accordingly. For instance, shares of Alphabet (GOOG 0.37%) (GOOGL 0.35%) and Meta Platforms (META 1.54%) are currently down 30% and 50%, respectively, from all-time highs.
An exception to this weak growth trend is The Trade Desk (TTD 0.85%), which has continued to post impressive financial results. But like other adtech stocks, its share price is down 51% from its high. That creates a brilliant buying opportunity for patient investors because the stock is well positioned to rebound during the next bull market.
The Trade Desk brings superior technology to digital advertising
The Trade Desk operates a demand-side platform (DSP). Its software helps advertisers deliver, measure, and optimize data-driven campaigns across desktop, mobile, connected TV (CTV), and other digital channels. That puts the company in front of a massive market opportunity; global digital ad spend is expected to grow at 10% annually to reach $836 billion by 2026, according to eMarketer.
Despite operating in a highly competitive industry, The Trade Desk stands out for a few reasons. First, it's the largest independent DSP, meaning it has access to tremendous amounts of consumer data. That scale makes its industry-leading artificial intelligence very effective. Second, it operates the only DSP built on bid factors, a technology that allows advertisers to quickly set expressive targeting parameters. Third, The Trade Desk has constructed the industry's most advanced data marketplace.
All of those advantages help advertisers target campaigns and measure performance more effectively, and that technological superiority has garnered attention from industry analysts. For instance, consulting firm Quadrant Knowledge Solutions recently recognized The Trade Desk as a leader in the ad tech space, citing a higher degree of technological excellence and a greater customer impact compared to other vendors.
Financially, The Trade Desk reported impressive results in the third quarter, despite battling industrywide headwinds. Revenue climbed 31% year over year to $395 million and non-GAAP earnings rose 44% to $0.26 per diluted share.
Those results are particularly mind-blowing when compared to the meager growth reported by the industry leaders. Alphabet saw third-quarter revenue increase just 6% year over year, and Meta saw revenue fall 4%. For that reason, CEO Jeff Green said The Trade Desk gained more market share in the third quarter than at any other point in its history.
More importantly, shareholders have good reason to believe that trend will continue. In addition to its superior technology, The Trade Desk also provides its customers with a level of transparency that ad giants like Alphabet and Meta cannot match.
The Trade Desk brings transparency to digital advertising
Alphabet and Meta Platforms undoubtedly dominate the digital ad industry. Collectively, they accounted for about half of global digital ad spend last year, which makes them the largest ad-based businesses on the planet. But that success is built on opaque business models that have drawn scrutiny from regulators and criticism from customers.
Specifically, Alphabet and Meta help advertisers buy ad space across a wide range of web properties, including properties they own (e.g., Google Search, YouTube, Facebook, and Instagram). That creates a clear conflict of interest, as both companies have reason to favor their own inventory. Additionally, both companies provide adtech tools to advertisers and publishers, meaning they serve the buy-side and the sell-side of the industry. That creates another conflict of interest, this one akin to a Realtor working for both the home buyer and the home seller.
The Trade Desk is much more transparent. As an independent ad tech vendor, it does not own any web properties, meaning it has no reason to steer ad buyers toward specific content. Additionally, The Trade Desk only works with ad buyers, which keeps its values aligned with its customers.
Those advantages have produced tangible results. The Trade Desk has maintained a customer retention rate above 95% for eight consecutive years, and it has won key partnerships in the two fastest-growing segments of the industry: CTV advertising and shopper marketing.
Specifically, The Trade Desk partnered with many content creators, meaning it can source inventory from virtually every ad-supported streaming service. That includes Disney+ and Hulu by Walt Disney, HBO Max by Warner Bros. Discovery, and Peacock by Comcast.
The Trade Desk has also partnered with 80% of the largest retailers in the U.S., giving its marketers access to data that can be used to measure campaign performance. Its retail partners include Walmart, Target, and Albertsons, among many others.
So what? Online video ad spend is expected to grow at nearly 14% annually to reach $362 billion by 2027, according to Omdia. And retail media ad spend (i.e., shopper marketing) in the U.S. is expected to grow at 22% annually to reach $61 billion by 2024, according to eMarketer. Those partnerships position The Trade Desk to capitalize on both opportunities.
The Trade Desk stock is trading at a reasonable valuation
In a nutshell, The Trade Desk brings superior technology and a more transparent business model to the digital ad industry, and those advantages should help the company take more market share in the coming years, especially once the economy rebounds and ad spend normalizes.
With that in mind, shares currently trade at 17.3 times sales, a discount to the three-year average of 30.4 times sales. That's why buying this growth stock now is a brilliant move for investors.
