The Trade Desk (TTD -1.50%) has generated dizzying returns since its IPO in 2016. It was valued at $576 million upon its public debut, and it's now worth about $30 billion. A $1,000 investment in its IPO would have grown to nearly $37,000.
The ad tech company's stock skyrocketed because investors were dazzled by its explosive growth rates. From 2016 to 2022, its annual revenue grew at a compound annual growth rate (CAGR) of 41%, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased at a CAGR of 47%.
Investors were also impressed by its ability to carve out a niche between Alphabet's Google and Meta Platforms in the saturated digital advertising market. But can The Trade Desk maintain its momentum and become a trillion-dollar stock -- which would require another 33-bagger gain from its current prices -- by 2040? Let's see if this ad tech darling has a shot at joining the 12-zero club within the next two decades.
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What does The Trade Desk do?
As the world's largest independent demand-side platform (DSP) for digital ads, The Trade Desk enables advertisers to easily purchase ad space across desktop, mobile, and connected TV (CTV) platforms. It sits on the opposite end of the ad supply chain from supply-side platforms (SSPs), which help publishers sell their ad inventories.
Google and Meta bundle together DSPs, SSPs, and other advertising tools on their advertising platforms, but they lock advertisers and publishers into their own walled ecosystems. The Trade Desk enables advertisers to break out of those walls and purchase ads across the "open internet" of other websites, apps, and streaming media platforms.
The Trade Desk generates a lot of its revenue from desktop and mobile ads, but it expects ad-supported streaming video platforms to drive its long-term growth. Walt Disney, for example, already uses The Trade Desk to drive advertisers to its linear and streaming TV platforms. 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 that market expands.
The Trade Desk is also expanding its ecosystem with new features like Solimar, which uses artificial intelligence algorithms to accumulate more first-party data for its advertisers; Unified ID 2.0, which eliminates the need for third-party cookies; and OpenPath, a tool that bypasses SSPs and connects publishers directly to advertisers. Those new services should widen its moat while insulating it from Apple's privacy changes on iOS and Google's elimination of third-party cookies on Chrome.
Could The Trade Desk generate more multibagger gains?
The Trade Desk has grown like a weed over the past six years, but analysts expect its growth to gradually cool off. From 2022 to 2025, they expect its revenue to grow at a slower CAGR of 22% as its adjusted EBITDA increases at a CAGR of 21%.
As for the broader digital advertising market, Precedence Research claims it could expand a CAGR of 9.2% between 2022 and 2030. Assuming The Trade Desk continues to grow at a faster rate than the broader industry with a more modest CAGR of 15% between 2022 to 2030, it could still generate about $4.8 billion in revenue by the final year.
Looking beyond 2030 is all pure speculation for now, since it's impossible to predict the exact direction of the advertising industry and the broader macro environment. But assuming The Trade Desk generates $4.8 billion in revenue in 2030 -- then continues to grow its top line at a CAGR of 15% for another 10 years -- it could hit $20 billion in revenue in 2040.
But even if it reaches that level -- which would be 13 times higher than its $1.6 billion in revenue in 2022 -- The Trade Desk's stock would still need to trade at a whopping 50 times sales for its market cap to hit $1 trillion. That wouldn't be a sustainable valuation, especially considering that its stock already seems pricey right now at 17 times this year's sales.
If The Trade Desk generates $20 billion in revenue in 2040 and trades at a more stable 10 times sales, it would be worth $200 billion -- which would represent a near seven-bagger gain from its current prices. That would be an impressive long-term return, but it might disappoint investors who expect The Trade Desk to replicate its post-IPO gains.
Focus on its growth instead of its market cap
Joining the 12-zero club by 2040 would be a remarkable accomplishment for The Trade Desk, but the math doesn't add up. So instead of focusing on how much its market cap swells, investors should focus on the expansion of its ecosystem, its victories across the open internet and CTV markets, and its ability to grow in the shadow of advertising behemoths like Google and Meta. If it accomplishes all those goals and keeps growing, it could still be a great growth stock for long-term investors.
