Advertising is a critical part of most businesses, especially retailers. But blindly dumping money into various advertising spaces (such as podcasts, the internet, or a Super Bowl commercial) isn't ideal. To inform companies about the best location to advertise, a data-driven solution like the one The Trade Desk (TTD 2.46%) provides is invaluable.
This has translated into immense success for the business and the stock, which has returned nearly 2,000% since its 2016 initial public offering. But what are its prospects moving forward? Let's look at the bull and bear case for The Trade Desk and see which argument holds more weight.
Bull Case: The Trade Desk's proprietary solution will allow it to dominate connected TV
The digital advertising market is massive and growing. With connected TV becoming more and more popular, one of the largest markets (estimated to be $175 billion annually) is opening up to targeted advertising, which The Trade Desk specializes in. While it's easy for companies to gather information about you on your phone or laptop, it's harder on a TV where that information isn't readily available.
However, The Trade Desk has a solution known as Unified ID 2.0 (UID2) that solves this problem. By associating email addresses with anonymous IDs that capture information on a user, it can transfer the user data seamlessly from device to device. The Trade Desk claims this is a more secure and accurate solution than tracking cookies, so it's an upgrade to cookies that will eventually become obsolete.
With The Trade Desk's products and services essentially reaching every corner of the digital ad market, it has a massive potential revenue stream. Wall Street analysts expect 19% growth this year and 24% next year, so there's a lot of growth ahead for The Trade Desk.
Plus, it's already profitable, unlike many other growing tech companies. However, the stock is far from cheap, which is my biggest concern.
Bear Case: The stock is trading at a hefty premium
It's difficult to argue against The Trade Desk's prospects, but even the most outstanding businesses purchased at the wrong price can make for a poor investment. At nearly 20 times sales, The Trade Desk's stock is incredibly expensive.
TTD PS Ratio data by YCharts
It's still above its pre-pandemic valuation highs despite growing at a slower rate, a combination that doesn't make sense. Even if The Trade Desk grows its revenue by 20% annually for the next five years and returns to the 25% profit margin it posted in 2021, it will only produce $983 million in net income in 2027. With a $30.5 billion market capitalization, that would mean The Trade Desk would trade at 31 times future earnings.
Remember, that's with five years of 20% growth and the company returning to its highest profitability levels. While I don't doubt The Trade Desk can do this, that's five years of growth with no stock price appreciation just to reach normal valuation levels. But is this likely to happen?
If The Trade Desk posts five straight years of 20% revenue growth, it will likely maintain an elevated valuation level due to its performance -- especially if there's still a market to be captured. So while I think investors could wait around and attempt to grab some shares at a lower valuation, if The Trade Desk continues posting solid results as it has, it's unlikely there will be many opportunities to purchase the stock below its current valuation.
When it comes to The Trade Desk, you get what you pay for. However, with its expensive valuation, I'd keep the position sizing somewhat small. That way, if the valuation drops, you can add more. But you won't be left out if it continues on its upward trajectory. The Trade Desk remains one of the best companies in this market, but you'll have to pay a premium to own it.
