The stock market has been through some unprecedented headwinds over the past year. At the top of growth-stock investors' list of complaints was the Federal Reserve's hawkish monetary policy.
Uncertainty about the effects of rapid interest rate hikes pushed the major stock market indexes into a long bear market. The growth stock-heavy Nasdaq Composite index is down more than 27% from the peak it reached way back in 2021.
Bear markets begin for different reasons, but they all have two common features: They're temporary, and throughout history, they've all been wiped away by subsequent market recoveries.
The next big bull market may have already begun, or it might not get started for a long time. One way or another, The Trade Desk (TTD 4.15%) is a stock you want to have in your portfolio during the next recovery phase.
Reasons to buy The Trade Desk stock
Shares of The Trade Desk spiked in 2021, but the stock is down around 47% from its previous peak. The company runs an independent platform that advertisers use to bid on available ad inventory and manage their campaigns.
The two giants of the digital advertising industry, Alphabet and Meta Platforms, have had a good run, but they're losing market share to The Trade Desk. Recently, both reported advertising revenue that contracted by around 4% year over year during the last three months of 2022.
The Trade Desk reported fourth-quarter revenue that soared 24% year over year, and this isn't the first time it's outpaced its largest competitors. Over the past five years, The Trade Desk has grown at more than twice the pace of Meta and Alphabet.
TTD Revenue (TTM) data by YCharts.
The Trade Desk is outpacing its industry's largest members, but it still has a lot of room to grow. The independent ad-tech platform generated $491 million in revenue in Q4, which is around 1.5% of the amount of total revenue Meta reported during the same period.
A bright future lit by connected televisions
A proliferation of streaming services means more of us are watching tip-tier programming on connected televisions (CTVs). Last July, streaming overtook cable for the first time in terms of America's total TV viewing time. This shift could fuel The Trade Desk's growth for years to come.
The world's largest buyers of advertising inventory cherish the brand safety they get from advertising on top-tier programming. Streaming fatigue amid a plethora of new subscription-based services is driving viewers toward ad-supported TV. Netflix famously launched its new ad-supported subscription tier last November, and free ad-supported television is increasingly popular. For example, Paramount's Pluto TV added 6.5 million new users in Q4, bringing its total to 79 million monthly active users.
In Q4, CTV was The Trade Desk's strongest growth driver, and investors can look forward to the company maintaining its position in this rapidly growing niche. The company's open-source technology for tracking users without cookies is quickly becoming the industry standard.
Called UID2, The Trade Desk's tracking technology allows publishers to serve highly relevant ads to end users while maintaining their anonymity. Disney is already applying UID2 across its media portfolio, and more recently, Paramount Advertising said it would integrate with UID2 to drive more demand for its CTV inventory.
Know the risks
The Trade Desk's stock price has fallen a long way, but it's still trading at 51.5 times forward-looking earnings expectations. I believe a lead position in the exploding market for CTV advertising will allow it to grow into this steep valuation.
The Trade Desk's future looks bright, but investors should understand that any unexpected slowdowns over the next several years could be met by a severe market beating. Investors should only add this stock to a well-diversified portfolio while it's trading at such a high valuation.
