If you had invested $1,000 in The Trade Desk (TTD 2.29%) when it went public in September 2016, your investment would be worth nearly $37,000 today. The same investment in an S&P 500 index fund would have only grown to about $1,900.
This ad tech company easily outperformed the market because its growth rates were explosive. Between 2016 and 2021, its annual revenue rose at a compound annual growth rate (CAGR) of 43% as its net income grew at a CAGR of 46%. But does The Trade Desk still have room to run after those massive gains? Let's review the bear and bull cases to find out.
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What the bears will tell you about The Trade Desk
The Trade Desk is the world's largest independent demand-side platform (DSP) for digital ads. DSPs enable advertisers to bid on ad space across desktop, mobile, and connected TV (CTV) platforms. They sit on the opposite end of the ad supply chain from sell-side platforms (SSPs) like Magnite (MGNI 3.92%), which enable publishers to sell their own ad inventories.
The bears will point out that other large digital advertising companies, including Alphabet (GOOG 9.84%) (GOOGL 10.12%) with its Google and Meta Platforms (META -0.34%), already bundle DSPs, SSPs, and other services together on their advertising platforms. Those bundles could be more cost-efficient than stand-alone DSPs and SSPs.
The bears will also note that The Trade Desk's revenue growth is cooling off. Sales rose 43% in 2021 and 32% in 2022, but analysts expect just 21% growth in 2023. So while the company is still growing rapidly, it isn't completely immune to the macro headwinds for the broader advertising sector.
Its margins are also gradually contracting as it ramps up its spending on new features. Its margin on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) held steady at 42% in 2021 and 2022, but analysts expect that metric to dip to 39% this year.
That slowdown seems minor, but the stock is still pricey at 16 times this year's sales and 42 times its adjusted EBITDA. Magnite, which is growing more slowly, trades at three times this year's sales and 11 times its adjusted EBITDA.
What the bulls will tell you about The Trade Desk
The bulls believe The Trade Desk can easily compete against Google, Meta, and other diversified advertising giants with three long-term strategies.
First, it will continue to attract advertisers that want to purchase ads across the vast "open" internet of independent websites, apps, and streaming TV services that haven't been locked into Google's and Meta's walled gardens.
Second, The Trade Desk expects the CTV market to drive its long-term growth as streaming platforms launch more ad-supported tiers. It already struck a big CTV deal with Disney's streaming platforms last year, while Netflix's recent rollout of an ad-supported tier suggests the nascent market is still expanding. According to eMarketer, CTV ad spending in the U.S. alone could more than double from $21.2 billion in 2022 to $43.6 billion in 2026 as linear TV platforms fade away.
Lastly, it's constantly upgrading its platform with innovative new features. Its new artificial intelligence-powered platform, Solimar, helps advertisers gather more first-party data to curb their dependence on third-party data. It's also rolling out a new Unified ID (UID) 2.0 data-tracking technology to eliminate the need for third-party cookies. These moves will counter Apple's privacy changes on iOS as well as Google's planned elimination of all third-party cookies by 2024.
The new OpenPath feature, which directly connects publishers to advertisers, could also render SSPs like Magnite obsolete and make The Trade Desk a more-diversified ad tech player like Google. Therefore, it isn't surprising to see its margins dip slightly as it widens its moat.
The bulls believe those strengths support its higher valuations. Analysts still expect its revenue and adjusted EBITDA to rise at a CAGR of 22% and 21%, respectively, from 2022 to 2025. Therefore, The Trade Desk's stock could still easily outperform Alphabet, Meta, and the broader advertising market over the next few years.
The bulls will remain in charge
The Trade Desk's stock isn't cheap, but its robust growth, constant innovation, and prioritization of the open internet and CTV markets justify its premium valuations. This isn't a stock for conservative investors, but I believe the bulls will stay in charge.
