Share prices of digital advertising software platform The Trade Desk (TTD 1.38%) have raced 70% higher through the first half of 2023. There's optimism that the digital ads industry will begin to improve later in the year, and The Trade Desk's already brisk pace of expansion will increase even more if this occurs.

The hype surrounding artificial intelligence (AI) also likely contributed to the stock's advance.  Indeed, even The Trade Desk got caught up in the market's enthusiasm. To help build on that enthusiasm, The Trade Desk announced a new AI-powered tool called Kokai in June 2023.

But is this new tool enough of a reason to buy The Trade Desk stock now?  

What is Kokai?

The Trade Desk's Kokai is a new AI tool designed to help marketers get the most out of their digital ad campaigns. Put simply, Kokai helps automate more tasks. The Trade Desk says new capabilities include:

  • Predicting ad auction prices to help advertisers place bids more effectively and get better pricing on purchases.
  • Scoring ad relevance whenever it's showed to a consumer (known as an impression) so ad campaign managers make sure ads are shown to the right people at the right time.
  • Automatically optimizing campaign performance based on factors like total budget, marketing goals, and targeted audience.

Additionally, Kokai features a new user interface to make its AI tools easier to use than ever. The platform will also feature retailer data provided by the media divisions from Albertsons and Walgreens Boots Alliance to help advertisers gain insights into the emerging world of internet streaming TV ads.  

The Trade Desk was already an AI play

All this sounds exciting, but it's important to remember that The Trade Desk was already an AI stock. Kokai will inherit (and expand upon) the role of the company's Koa AI-powered service, which has been running since 2018. 

The Trade Desk has always been known as a programmatic advertising software platform, meaning it helps automate marketing campaigns from purchase to ad impression analysis. Programmatic ads are a fast-growing sub-segment of the digital marketing universe, and automated buying and delivery of ads are well on their way to becoming the dominant force in the marketing world overall -- which is on a path to reaching $1 trillion per year in spend some time this decade.  

Time to buy The Trade Desk stock, right?

Programmatic advertising (that is, automated marketing using AI tools) has lots of merits, and The Trade Desk has been leading this charge for years now. But that doesn't mean the stock is a buy right now.

Back in May, I was growing cautious on the company's valuation even before Kokai was announced. Of course, The Trade Desk deserves a premium price tag given its enduring growth. It's also profitable, and getting more so by the quarter -- especially as measured by free cash flow. But at this juncture, future expectations appear to be priced in to such an extent it might make sense to wait on the sidelines for a while. Shares trade for 54 times the current Wall Street analyst consensus for expected free cash flow in 2024.

Don't get me wrong, I believe The Trade Desk could meet or even exceed these lofty expectations. But a high premium price all but guarantees some volatility in stock price going forward as even the slightest divergence from Wall Street expectations can lead to some big price swings. If you absolutely must buy now, and plan to hold for the long term, I'd preach using a dollar-cost average plan at this point.

AI is exciting, and it promises to unlock new efficiencies for businesses like The Trade Desk. However, be careful about blindly chasing this stock after the most recent run-up. I'm content with my current position, and I want to wait and see what the company reports in the way of financial results on its next earnings update first.