Economic headwinds have been problematic for many ad-based businesses recently. Consumer demand has softened in response to high inflation and rising interest rates, so brands have naturally pulled back on their marketing spending. The Trade Desk (TTD 4.15%) has suffered as a result, with revenue growth slowing, and while its share price has rebounded somewhat in 2023, it's still down by 42% from its peak. But the company is well-positioned to soar when economic conditions improve and the next bull market comes along.
Here's why now is a perfect time to buy this growth stock.
The Trade Desk has superior technology
The Trade Desk runs a demand side platform. Its software helps marketers plan and optimize data-driven ad campaigns across a variety of digital formats -- including desktop, mobile, and connected TV -- and measures their results. The Trade Desk is a much smaller company than the ad giants that lead the industry -- Alphabet and Meta Platforms -- but its platform packs superior technology. In fact, consulting company Quadrant Knowledge Solutions recently recognized The Trade Desk as the ad tech leader, noting that it outscored every other vendor on customer impact and technology excellence.
The Trade Desk designed its platform on bid-factor-based architecture, which allows for more expressive targeting than the line-item-based architectures used by other demand side platforms. Additionally, it has infused its platform with an industry-leading artificial intelligence engine and the most advanced data marketplace in the world, according to management. With a better engine and better data, advertisers can target and measure campaigns more effectively, which ultimately results in greater returns on their ad spending.
The Trade Desk is an independent ad tech company
The Trade Desk does not own any content platforms, so it has no reason to push advertisers toward any specific platform's ad inventory. It wins when its clients succeed, so its values are aligned with theirs.
That puts it in a dramatically different position than Alphabet and Meta Platforms. Alphabet owns Google Search and YouTube, while Meta Platforms owns Facebook and Instagram, but both companies also work with third-party publishers. That creates a conflict of interest. Alphabet and Meta Platforms have incentives to steer ad buyers toward their own inventory, whether or not those platforms are actually the best places for the buyer's ads.
Additionally, brands are increasingly hesitant to bring their data to Google and Meta because both companies will use that data to help them sell their own ad inventory. The Trade Desk's independence means it avoids such conflicts of interest, and that advantage has led to several important partnerships.
Most notably, The Trade Desk sources inventory from almost every major ad-supported streaming service, including Warner Bros. Discovery's HBO Max, Disney's Disney+ and Hulu, and Comcast's Peacock. Additionally, The Trade Desk has partnered with more than 80% of the largest retailers in the U.S., providing its advertisers with access to shopper data that can measure and optimize campaigns. Walled gardens like Google and Meta do not have access to that data, and they cannot provide the same measurement capabilities.
Those partnerships are particularly noteworthy because connected TV advertising and shopper marketing are the two fastest-growing segments of the U.S. digital ad industry.
The Trade Desk is gaining market share
Despite the economic headwinds, The Trade Desk reported solid financial results for 2022. Revenue increased by 32% to $1.6 billion, and cash flow from operating activities climbed by 45% to $549 million. To be clear, top-line growth did decelerate from 43% in 2021, but that matters very little. Instead, investors should focus on how The Trade Desk performed relative to its peers and the broader industry.
Last year, Alphabet reported 7% growth in ad revenue, while Meta reported a 1% decrease. More broadly, eMarketer estimates that global digital ad spending increased by about 9% in 2022. The Trade Desk crushed all those figures, meaning it's gaining on the industry leaders and grabbing market share at a rapid clip. Better yet, given its strong competitive position, investors have good reason to believe it can maintain its momentum.
On that note, the size of the global addressable market for digital advertising is approaching $1 trillion, meaning The Trade Desk has hardly scratched the surface of its potential. Yet shares currently trade at 19 times sales, a discount to the three-year average of 30 times sales. That's why now is a perfect time to buy a few shares of this growth stock.
