Artificial intelligence (AI) could accelerate digital transformation and unlock $6 trillion in online spend across several industries, according to a March report from Morgan Stanley. The impact could be particularly profound in areas like digital advertising and e-commerce, and analysts at the investment bank selected The Trade Desk (TTD 1.67%) and Etsy (ETSY 0.34%) as two companies "uniquely positioned to drive and benefit from the AI transformation ahead."
Here's what investors should know about these growth stocks.
1. The Trade Desk
The Trade Desk is the largest independent adtech company in the world. Its software leans on what management calls "industry-leading" AI to help ad buyers plan, measure, and optimize data-driven campaigns across digital platforms like connected TV, mobile, and desktop. The Trade Desk has differentiated itself through transparency and technological prowess.
As an independent adtech company, The Trade Desk avoids the conflicts of interest that come with owning web content. For instance, while Alphabet helps ad buyers find ad space across the internet, the company has a clear incentive to prioritize its own inventory of ad space adjacent to Google Search results and YouTube videos. In that context, The Trade Desk is a more transparent business, so brands are more willing to share their sensitive data with the company.
That has allowed The Trade Desk to build the "most advanced data marketplace" in the adtech industry, and data advantages are the cornerstones of differentiated AI models. Spotlighting its technological prowess, consultancy Quadrant Knowledge Solutions recently ranked The Trade Desk as the best adtech platform on the market. Collectively, those qualities have undoubtedly contributed to steady market share gains in recent years.
Indeed, in the second quarter, The Trade Desk's revenue climbed 23% year over year to $464 million -- easily topping the 3% ad revenue growth reported by Alphabet -- and its GAAP net income improved to $33 million, up from a loss of $33 million in the prior-year period. "Our relative outperformance over the last few quarters means we have gained more market share than in any other period in our company's history," said CEO Jeff Green on the Q2 earnings call.
Grand View Research expects the adtech market to grow at a compound rate of roughly 14% annually through 2030, but The Trade Desk should grow more quickly (as it has in past years) given its strong competitive position. With that in mind, shares currently trade at 24.1 times sales, a discount to their five-year average of 25.7 times sales. That is by no means cheap, but patient investors should still feel comfortable buying a small position in this growth stock today given its potential upside.
2. Etsy
The e-commerce space is defined by intense competition, but Etsy has separated itself from the pack by catering to small sellers that specialize in non-commoditized goods across a range of categories, including mainstays like apparel and home decor. The Etsy brand is synonymous with unique, vintage, and artisanal products, and items sold on the marketplace are often customizable. Consumers are unlikely to find a similar shopping experience at any other retailer of scale.
That unique value proposition has helped Etsy become the sixth-most popular online marketplace worldwide as measured by monthly visitors. That scale lays the foundation for a powerful network effect that should help the company defend its niche in the e-commerce industry. But management is also spending heavily on AI product development in an effort to take share.
Etsy is arguably more susceptible to macroeconomic headwinds than most retailers, especially those that deal in consumer staples, and the company has indeed struggled in recent years. Its inflation-fueled challenges continued in the second quarter. Revenue increased by just 7% to $629 million, and GAAP net income declined 15% to $62 million.
Fortunately, there is a silver lining: Economic difficulties are temporary, and Etsy is taking sensible steps and making investments to boost buyer engagement by improving search and discovery. Apart from using AI to better personalize recommendations, Etsy is also training its AI models to prioritize listings that buyers will perceive as high quality. CEO Josh Silverman says that strategy "can unlock enormous amounts of growth" in the coming years.
Silverman also sees room for further improvements with generative AI. Buyers are apt to be overwhelmed by the 115 million listings on the marketplace, many of which are difficult to catalog given the non-commoditized nature of the products. But a natural language interface could help resolve that problem by making search more conversational. For instance, buyers could simply ask the AI to recommend a blue shirt suitable for a job interview.
Etsy has captured roughly just 3% of what it sees as a $466 billion market opportunity, which leaves plenty of upside for shareholders, and the company's growth could certainly reaccelerate as economic conditions improve, especially if its efforts to upgrade its search and discovery tools bear fruit. With that in mind, shares currently trade at 3.1 times sales -- their cheapest valuation on that metric in five years. At that price, investors should pick up a few shares of Etsy stock.
