Digital advertising has boomed over the last decade as ad budgets have shifted to internet channels like search, social media, and connected TV.
That's led to a windfall for ad tech stocks, many of which have soared over that time. However, more recently, demand for digital advertising has fallen flat due to macroeconomic headwinds and difficult comparisons following a boom earlier in the pandemic.
That's weighed on the ad tech sector, and many of these stocks have fallen sharply over the last year. However, advertising is cyclical, and these stocks should rebound as advertising demand returns. In fact, many of these companies have promising long-term growth opportunities as demand for more sophisticated digital advertising tools will grow.
Keep reading to see two ad tech stocks that could pay off big down the road.
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1. The Trade Desk
The Trade Desk (TTD -3.91%) is the most recognized name in the ad tech industry and the leading demand-side platform (DSP). The Trade Desk provides a cloud-based self-serve platform that helps brands and ad agencies manage their ad campaigns.
The company has consistently put up high growth over its history and has reported customer retention of 95% or better in every quarter for nine years straight.
The Trade Desk is also setting the standard for the post-cookies world in advertising with its Unified ID 2.0 (UID2) protocol. Alphabet's Google plans to get rid of third-party cookies in Chrome by 2024, which could result in a significant setback to advertisers.
However, it also creates an opportunity for an alternate solution, like UID2. Already, UID2 has signed up corporate behemoths like Disney, Procter & Gamble, and Amazon Web Services for the identity framework, showing that it could become the standard once cookies go away.
Meanwhile, The Trade Desk continues to deliver strong results even in a challenging environment. In the fourth quarter, revenue rose 24% to $491 million, easily outpacing its ad tech peers and digital advertising platforms like Google and Meta Platform's Facebook. It continued to gain market share as the platform saw $7.8 billion in gross spend on advertising in 2022.
The Trade Desk is also highly profitable, posting a 42% adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2022; its adjusted profit margin was 33%.
The Trade Desk continues to roll out new products like Galileo, which allows advertisers to onboard their own first-party data easily. Despite the macro headwinds, the future looks bright for The Trade Desk, thanks to its history of revenue growth, product innovation, and strong customer retention.
2. Perion Network
Perion Network (PERI -2.45%) was the only ad tech stock to post gains on the stock market last year, a testament to the company's ability to outperform in a difficult environment.
Perion offers an intelligent hub that connects ad buyers and sellers, helping them optimize their ad campaigns, spending, inventory, and placement. The company also offers premium ad experiences like QR codes in connected TV and ads that run simultaneously with live events so that they aren't disruptive.
Like The Trade Desk, Perion offers its cookie-less alternate tracking solution called SORT. The company said 59% of its agencies and brand customers adopted SORT, generating $59.4 million in revenue.
Perion has also delivered strong margins in its recent history, as it had an adjusted EBITDA margin of 21% in 2022, and its adjusted EBITDA nearly doubled in the year.
The ad tech company is also holding something of a wild card as it has a partnership with Microsoft's Bing, helping its advertisers better monetize clicks. If Bing can gain significant market share from Google, Perion could be a big winner. More than 40% of its revenue already comes from search traffic, primarily Bing, and search outgrew display advertising revenue in the fourth quarter. Search is favored in uncertain times because it tends to deliver a more reliable ROI.
Based on its track record and history of acquisitions, Perion should continue to deliver solid growth and take market share in the ad tech industry. The stock also looks very reasonably priced at the moment, trading at a price-to-earnings ratio of just 16 based on its adjusted earnings.
That should set the ad tech stock up to outperform over the long term.
