While there are signs of a rebound on the horizon, the Nasdaq Composite remains mired in bear market territory, still down 24% from its peak in late 2021. Macroeconomic uncertainty remains, as the Federal Reserve recently warned of a minor recession later this year.
It's always darkest before the dawn, or so the old saying goes, and history suggests that the market rebound will most likely begin before the recession is even over. This suggests that the best time to buy stocks is now -- particularly in those companies that have continued to make progress in the face of the current economic headwinds.
One especially compelling bear market bargain hiding in plain sight is The Trade Desk (TTD 1.67%). The adtech pioneer is still down 43% from its peak, but a glance under the hood shows a stock that investors will regret not buying on the dip.
Image source: Getty Images.
The ever-changing cycle
The only constant is change, and that is especially true in the advertising industry. In 2023, digital advertising is expected to account for more than $0.67 of every marketing dollar. While digital advertising took the baton from legacy marketing, programmatic advertising -- which uses automated systems to handle the ad-buying process -- is gaining prominence in the space. In fact, programmatic advertising is the fastest-growing segment of the industry, expected to climb 17% in 2023 and account for roughly 91% of all digital display ad spending.
The Trade Desk is the world's leading independent demand-side ad-buying platform, with access to all the fastest-growing channels, including connected TV (CTV), video, audio, mobile, and display, among others. The company's state-of-the-art platform evaluates nearly 9 million ad impressions and quadrillions of permutations each second, targeting the intended audience and ensuring marketers get the most bang for their buck. The Trade Desk not only gives ad buyers access to all the most important avenues, but it also provides transparent pricing -- otherwise unheard of in the industry -- making partners of the world's largest advertising agencies.
Perhaps as importantly, The Trade Desk has long prepared for the death of cookies, the bits of computer code that track audiences across the internet. The company developed Unified ID (UID) 2.0 as the heir apparent to cookies, subsequently making the code open source and turning it over to the Interactive Advertising Bureau (IAB), a leading trade association, whose members are responsible for 75% of online advertising in the U.S.
Show me the money
It's well documented that marketers tend to cut back on spending in the face of economic uncertainty, making 2022 a tough year for advertising. Yet The Trade Desk came through last year with flying colors. Its revenue grew 24% year over year in the fourth quarter, even as its two largest competitors -- Alphabet's Google and Meta Platforms -- suffered from declining ad sales. Perhaps more importantly, The Trade Desk generated income last year, continuing an unbroken streak of profits dating back to 2013.
The Trade Desk's management is anticipating slower growth for the upcoming first quarter, forecasting revenue of $363 million, an increase of just 15% year over year, with adjusted EBITDA rising 10%. However, that guidance may end up being conservative. Some industry officials believe the ad market has already bottomed out, with some sectors of the industry beginning to show improvement.
Plenty of opportunity ahead
The ongoing shift to digital advertising continues, and The Trade Desk is well positioned to continue to ride this secular trend. The company generated revenue of about $1.6 billion last year, which is a drop in the bucket compared to its enormous opportunity. While estimates vary, global digital advertising spend is expected to grow from $567 billion in 2022 to nearly $836 billion by 2026, a compound annual growth rate (CAGR) of roughly 10%, according to Oberlo. This helps to illustrate the long runway for growth that remains.
Finally, The Trade Desk stock has never been cheap, at least in terms of traditional valuation metrics. The Trade Desk currently trades for 13 times next year's sales, when most experts agree a reasonable price-to-sales ratio is between 1 and 2. However, given the company's unblemished record of above-average growth, its resilience in the face of economic headwinds, and its large and growing opportunity, I think the stock's premium is well deserved.
