Advertising-technology company The Trade Desk (TTD -0.54%) went public in September 2016 at $18 per share. The company's initial public offering (IPO) was in hot demand and it immediately started trading at over $28 per share. It finished its first day of trading at $30.10 per share.
For simplicity, let's say you invested $10,000 in The Trade Desk's IPO at $30 per share -- an attainable price on the first day. With that investment, you were able to buy 333 shares. After a 10-for-1 stock split in 2021, those shares became 3,333 shares. Therefore, that $10,000 investment has grown to about $160,000, as of this writing.
Investing $10,000 in an IPO stock would be a bold move for most investors. However, there was a compelling investment thesis for The Trade Desk stock back in 2016. And the investment thesis today hasn't changed from what it was back then.
Why The Trade Desk stock is up
Think of an investment thesis as a description of cause and effect. If you believe The Trade Desk stock will go up, that's the effect. But investors still have to list the things that they believe will happen that will cause the stock to go up.
In its filings to go public in 2016, The Trade Desk's management cited some fascinating third-party research. According to its sources, nearly $640 billion was spent worldwide on advertising in 2015. Of this, $14.2 billion -- a paltry 2% -- was spent on programmatic advertising, which is what The Trade Desk does.
Programmatic advertising has advantages. With programmatic ads, advertisers can target specific demographics at specific times across various price points. When done well, publishers generate more revenue, advertisers reach intended audiences, and consumers are shown relevant ads. It was only logical to assume this would catch on.
And catch on it has. According to Statista, global spend on programmatic advertising is up more than 160% from 2017 through the end of 2022.
Investors may or may not believe that The Trade Desk is the best player in this industry. But they can't deny that The Trade Desk is good enough to take market share in programmatic advertising. This is reflected in the company's stunning revenue growth.
TTD Revenue (TTM) data by YCharts
In 2021, The Trade Desk increased full-year revenue by 43% compared to 2020. Finalized financial results for 2022 are expected on Feb. 15. But through the first three quarters of 2022, the company's revenue jumped 36% from the comparable period of 2021.
A good investment thesis for The Trade Desk stock in 2016 would have looked something like this: Spending on programmatic advertising is a small sliver of the total spend for advertising. And since programmatic advertising is advantageous, it should grow rapidly. Moreover, The Trade Desk is taking market share, which allows it to grow even faster than its peers and increase its revenue at a market-beating pace.
Going forward
It's 2023 now but I don't believe that the investment thesis has changed for The Trade Desk stock since 2016.
In the Q3 conference all, The Trade Desk's founder and CEO Jeff Green said, "I believe that through the first nine months of the year, we have gained more market share, grabbed more land, than at any point in our history." That's a bold statement. And if it's true, then perhaps momentum is building for this company even though 2022 was a slow year for the industry as a whole.
Recent analysis from ResearchAndMarkets.com predicts that programmatic advertising will grow at a nearly 27% compound annual growth rate (CAGR) through 2026. Assuming The Trade Desk can continue growing faster than this by taking market share, perhaps it could grow at a 30% CAGR.
The Trade Desk's management expects to generate nearly $1.6 billion in full-year revenue in 2022. Growing at a 30% CAGR, the company's revenue could be approaching $4.5 billion by 2026.
Trading at 16 times its trailing sales, many say The Trade Desk is an expensive stock. And I won't argue the point -- it is. I'm also not predicting a 30% CAGR for the company with certainty -- it's a hard growth rate to sustain.
However, if the programmatic ad market grows as expected and if The Trade Desk executes as it has since its 2016 IPO, then it can indeed grow enough to justify its lofty price tag. And that's why this is a stock I own in my own portfolio.
