Advertising is an age-old industry, a cornerstone of the global economy. While it will probably always be around, how companies market goods and services has changed over the years. Today, advertising is becoming increasingly digital and sophisticated, and The Trade Desk (TTD -0.54%) has been on the edge of innovation since its inception in 2009. The stock went public in 2016 and had you invested $10,000 into its initial public offering, you'd be sitting on $214,000 today.
After the stock appreciated more than 21-fold, it might seem like the golden years are over. Fortunately, The Trade Desk could be just getting started. Here is why the stock's long-term future looks as bright as ever.
Innovation in a massive market
Advertising is gradually moving from traditional media like print, radio, and broadcast television to digital formats like online and streaming. According to Research and Markets, the global digital advertising market is valued at around $531 billion today and could grow to $1.5 trillion by 2030.
Big technology companies like Meta Platforms and Alphabet have dominated digital advertising for years. Companies spend on ads within these companies' ecosystems, where Meta or Alphabet would dictate who saw an ad, determine how well it did, and give little control to the advertiser. This is commonly called a walled garden system.
The Trade Desk gives advertisers an alternative: an automated ad exchange where companies can purchase ads across digital formats (display, video, and more) and get complete control and transparency. In other words, advertisers want to make their own rules when they spend marketing money, not play by someone else's.
TTD Revenue (TTM) data by YCharts. TTM = trailing 12 months.
When you compare The Trade Desk's $1.5 billion in revenue to a company like Alphabet doing many times that, you see the long growth opportunity ahead, especially when you consider the overall growth taking place in digital advertising. The Trade Desk's revenue growth has slowed in recent quarters due to advertisers cutting back spending in fear of a recession. Still, investors should feel optimistic that growth will pick back up. The long-term opportunity is just too ample for it not to.
Sparkling financials will drive returns
The Trade Desk's strong profitability sets it apart from many growth stocks on Wall Street. The company is a free-cash-flow machine, turning $0.29 of every revenue dollar into cash profits. It has turned a profit since 2013 and has stacked cash on its balance sheet without having to issue vast amounts of stock or borrow.
TTD free cash flow data by YCharts.
There is over $1.3 billion in cash on the books today against zero debt. The company has plenty of funding to continue leaning into growth, repurchase shares over the coming years, or make an acquisition. Cash is like oxygen to a business, so the fact that The Trade Desk generates it so easily instills confidence in its ability to create value for shareholders in the future.
Should you buy shares today?
So the future is bright, but what about now? The stock's strong fundamentals have supported the share price better than many stocks over these past 18 months. Shares are down roughly 40% from their high. Using estimated 2023 earnings per share, the stock commands a forward price-to-earnings ratio (P/E) of 57, a significant premium to the broader market.
TTD PE ratio (forward) data by YCharts.
But keep in mind that The Trade Desk is positioned to grow its bottom line rapidly over the coming years -- by nearly 30% annually, according to analysts. A long-term investor willing to hold for at least a few years could easily see the stock grow into its valuation. A 30% earnings growth rate puts the stock at a P/E of 25 in three years, and it seems like the company has enough left to grow well beyond the next few years.
Growth stocks can be volatile by nature, so prepare for that when holding a stock like this. That said, the makings are there for long-term investors to be rewarded handsomely.
