Thanks to the rise of digital advertising, The Trade Desk (TTD 1.67%) has been one of the top-performing stocks of the past decade, delivering impressive returns for investors.
The question remains for those who missed the company's incredible run: Is now the time to buy? And for existing investors, is it time to take profits or hold on for more gains?
This article will explore the potential upside and downside of investing in the stock today.
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The bull case
The Trade Desk is a demand-side platform that helps advertisers buy and manage digital advertising campaigns in real-time. Its value proposition is to provide customers with a data-driven platform to place and manage digital advertising across various channels, enabling them to reach their target audiences more effectively and efficiently. In short, the company helps customers get better outcomes with lower advertising budgets.
By helping customers become more successful, The Trade Desk has become indispensable to its clients, which is evident in its financial performance. In the last five years, revenue grew more than fivefold, from $308 million in 2017 to nearly $1.6 billion in 2022.
Besides its solid value proposition, The Trade Desk was hugely successful thanks to the massive tailwinds behind it. The most significant tailwind is the continuous migration from traditional advertising into programmatic and digital advertising globally. On top of that, the company benefited enormously from the growth of new channels such as connected TV. To put the above into perspective, it is playing in a vast market with a target addressable market size of $816 billion globally.
The good news is that all these positive tailwinds will continue for the foreseeable future. So long as the platform can continue to help customers get more done with less, The Trade Desk is bound to grow for a long time.
The bear case
While the company has much going on, it faces many risks that could rock its business performance.
Topping the list is the challenging macro environment, thanks to issues like the weak global economy, geopolitical tension, etc. While it's hard to quantify the impact of these trends, The Trade Desk will likely face some near-term headwinds as advertisers hold back on their marketing budget. In fact, there was an early sign of weakness when it reported slower revenue growth in the fourth quarter of 2022 compared to the earlier quarters of 2022.
Besides, the industry is highly competitive, with established players and new entrants vying for market share. The company would have to face the likes of Alphabet, Facebook, Amazon, or any wannabe player in the programmatic advertising industry. Though The Trade Desk has a significant head start and solid relationships with its customers, there is no guarantee that competitors cannot develop better technologies that disrupt its dominance.
All these issues do not bolt on nicely if we consider that The Trade Desk stock trades at a premium valuation. For perspective, the stock trades at a price-to-earnings ratio of more than 600. If the company fails to deliver or investor moods change, the stock price may fall to reflect the new realities. And when that happens, even the most bullish investors may lose confidence and sell the stock.
So buy, hold, or sell?
The Trade Desk has been a strong performer in the digital advertising industry thanks to its solid value proposition and the industry's tailwinds.
However, the company faces challenges, including an increasingly more challenging macro environment and stiff competition. The real deal breaker is that the stock trades at a premium valuation, leaving little room for error.
Overall, new investors will not be wise to buy at the current price point. And existing investors can consider holding the stock -- if they can withstand the potential volatility ahead- since the company still has plenty of growth potential.
