Joining the Nasdaq-100 in July earlier this year, The Trade Desk (TTD 1.67%) and its advertising demand-side platform (DSP) continued along its path toward becoming one of the most influential companies of our era.
Rising around 2,490% since its 2016 initial public offering (IPO), The Trade Desk would have turned a $1,000 investment into nearly $26,000 in just over seven years.
Letting ad buyers choose from more than 500 billion ad opportunities daily, The Trade Desk's platform helped power revenue and free cash flow (FCF) growth of over 700% since the company's IPO. Despite this incredible growth operating in a digital advertising industry expected to grow from $616 billion in 2022 to over $1 trillion in 2027, the S&P 500 index is yet to give Trade Desk the green light.
So what will it take for The Trade Desk to join?
First, let's see if it qualifies.
S&P 500 selection criteria
While there are numerous criteria that a stock needs to meet to join the index, it looks like The Trade Desk checks all the boxes necessary, including:
- A market capitalization above $14.5 billion: The Trade Desk easily surpasses this threshold, currently trading with a market capitalization -- or company price tag -- of around $36 billion.
- Positive earnings over the last year: Although the company did report one quarter where its trailing 12 months of net income was negative (mainly due to stock-based compensation earned from a skyrocketing share price), it has been consistently profitable since its IPO. In its most recent quarter, The Trade Desk reported a net income margin of 7% but has seen this figure above 25% in the past, highlighting its ability to generate outsize profits.
- More than 50% of revenue from the United States: Domiciled in the U.S. and generating roughly 88% of its revenue from North America in the last quarter, the company easily meets this bar.
Additionally, the company meets the liquidity and volume measures needed to join the index, meaning that it's eligible to be chosen, should it catch the eye of the selection committee.
What The Trade Desk would bring to the S&P 500
Along with meeting the basic requirements and delivering tremendous revenue and FCF growth in its short time as a public company, The Trade Desk's operations sit right at the center of numerous major trends:
- The rise of connected television (CTV): Statista estimates CTV advertising spending will double from 2022 to 2027. This makes The Trade Desk's reach to more than 90 million households and 120 million CTV devices a massive opportunity, especially as CTV advertising enables one-to-one marketing -- earning the company a more significant cut of spending. Accounting for 45% of sales in the last quarter, CTV continues to be the company's fastest-growing vertical, outpacing overall sales that rose 23% in the second quarter.
- The fall of third-party cookies: As these cookies continue to be phased out over time, many advertisers are worried about the effectiveness of their digital marketing abilities without this information. In a study by Epsilon, roughly 80% of marketers stated they were very or moderately reliant upon third-party cookies. This is where The Trade Desk's Unified ID 2.0 (UID2) comes in. The company has created a valuable upgrade to privacy-invasive cookies by taking customers' email addresses or phone numbers and turning them into anonymized IDs. In use by virtually every streaming company operating in the U.S., UID2 is also being tested for integration by the world's largest retailer, Walmart.
- Retail media: Speaking of Walmart, the behemoth paired with The Trade Desk to build its own DSP to provide better precision to its brand partners. This retail media -- or shopper marketing -- combination has proven to be an immediate hit for clients. Fruit of the Loom, for example, was looking to generate a 200% return on ad spend working with Walmart and The Trade Desk -- but yielded a mark north of 1,000%. This simple example could highlight the inherent power hidden within the company's burgeoning retail media unit.
Buoyed by these unique growth drivers, The Trade Desk looks well positioned to bring a lot of growth to the S&P 500 Index, particularly as it gradually continues expanding outside of North America.
Despite a snub from the S&P 500, should investors buy The Trade Desk?
Ultimately, I believe The Trade Desk is a brilliant selection for the S&P 500 Index. However, it may make for an even better dollar-cost averaging pick for investors to add to on dips over time.
Trading at a price-to-sales (P/S) ratio of 23, the company is not cheap. But it never has been "traditionally cheap" at any point along its path to providing 25x returns to investors.
Considering this, the S&P 500 and investors alike would be wise to keep The Trade Desk in mind as the company continues to forge its path in the massive world of digital advertising.
