Advertisement technology provider The Trade Desk (TTD 2.15%) has turned out to be a top performer in the stock market over the past five years, generating solid returns for investors thanks to its impressive growth that the massive opportunity in the digital ad market has driven.
A $1,000 investment in The Trade Desk five years ago is now worth nearly $12,000. By contrast, a $1,000 investment in the S&P 500 index over the same period would be up to $1,700 today. The Trade Desk's stock has seen a terrific annual return of 64% over this five-year period, which is not surprising given how fast it has been growing its business over the years. The company ended 2022 with $1.6 billion in revenue, up from $308 million at the end of 2017, for a compound annual growth rate (CAGR) of 38%.
It is worth noting that The Trade Desk has been outgrowing the industry it operates in. Persistence Market Research estimates that the global programmatic advertising market has clocked annual growth of 33% since 2017.
More importantly, this market is expected to sustain its solid growth rate over the next decade, clocking annual increases at an estimated 35% through 2032.
Does this mean The Trade Desk can replicate its outstanding returns over the next five years as well? Let's find out.
There's massive room for growth over the next five years
We have already seen that the programmatic ad market still has a lot of room to run over the next decade, which means that The Trade Desk's addressable opportunity should continue to improve. Management says that global ad spending worth $816 billion is its total addressable market, which includes channels such as linear television and display advertising.
The company believes that all advertising is going to be transacted digitally in the future, and that's where its opportunity lies. The Trade Desk's self-service platform allows agencies and brands to choose from more than 500 billion digital ad opportunities daily across multiple channels such as connected TV, display, online video, audio, smartphones, and tablets.
It enables marketers to target specific audiences based on their requirements and budgets with the help of its automated, real-time platform, helping them drive stronger returns on their ad spending. This explains why the company has been recording healthy growth even at a time when the digital-ad spending market is facing headwinds.
For example, 2022 revenue improved 32% over the prior year even though Alphabet and Meta Platforms struggled to grow their ad revenue last year. Alphabet's revenue from Google advertising was down to $59 billion in the fourth quarter of 2022 from $61.2 billion in the prior year. Meanwhile, Meta's advertising revenue contracted to $113.6 billion in 2022 from almost $115 billion in 2021.
But the advantage of The Trade Desk's algorithm-driven platform, which employs artificial intelligence (AI) to deliver a stronger return on investment (ROI) to marketers, seems to have given the company an edge over industry bigwigs. As a result, it won't be surprising to see it sustain a high pace of growth for the next five years.
How much upside can investors expect in the next five years?
The chart below indicates that The Trade Desk is on track to deliver healthy revenue growth through 2025.
TTD revenue estimates for current fiscal year data by YCharts.
Based on the $1.58 billion revenue that the company delivered in 2022, the forecast above indicates that The Trade Desk's top line could clock a CAGR of 22% for the next three years. If the company can sustain this level of growth in 2026 and 2027, then its revenue would hit nearly $4.3 billion after five years.
The Trade Desk stock currently has a price-to-sales (P/S) ratio of 19.5. Though that's expensive, it is lower than the company's five-year average sales multiple of 26. Given that it is outperforming the digital ad market, and it could keep doing so in the future considering the discussion above, its stock should be able to command a high sales multiple in the future as well.
Assuming The Trade Desk has a P/S of 19.5 after five years, its market capitalization could jump to almost $84 billion based on the 2027 sales forecast of $4.3 billion. That would be close to triple its current market cap of $30 billion. So investors who have missed its rally over the past five years can still consider buying this tech stock given the potential upside it could deliver.
