Is The Trade Desk a Good Artificial Intelligence (AI) Stock to Buy?

Artificial intelligence (AI) is a hot topic in 2023, leading to a plethora of companies touting AI capabilities. In this environment, it's hard to distinguish between businesses that will deliver AI-powered value over the long term and those that may be jumping on the bandwagon.

AI isn't just the latest fad for The Trade Desk (TTD 1.67%), which used artificial intelligence as part of its digital advertising platform since 2018. The firm describes its AI as a "co-pilot" helping marketers to optimize the performance and spending of their advertising with The Trade Desk.

And if AI assists marketers to achieve better results with less effort and cost, this translates into more ad spending on The Trade Desk's platform. Here's a look at the company's use of AI and how it's helping to deliver tangible business results.

How The Trade Desk uses AI

The Trade Desk's implementation of AI is important to its business because the technology plays a key role in digital advertising. Marketers gravitate toward digital ads for its measurable results and ability to target specific customers.

But this also means dealing with tons of data as marketers evaluate the effectiveness of their advertising and return on investment, such as whether the ads they ran met their marketing goals. This is where The Trade Desk's AI, called Koa, steps in to help.

Koa analyzes data from a marketer's advertising efforts to identify trends and provide recommendations. It automatically optimizes ad spending. Koa can even suggest the types of consumers a marketer should target with ads.

Massive mountains of data are required for AI software to operate effectively and accurately. Here's where The Trade Desk's scale gives it an advantage. Koa looks at 10 million website and app requests for ads every second.

Clients who use Koa find it produces higher return on their advertising investment. By using AI, 41% of marketers achieved better ad performance and revenue growth. Such strong results help The Trade Desk retain customers, as evidenced by its 95% retention rate.

The Trade Desk's financial performance

Innovations such as Koa contributed to The Trade Desk's revenue growth even amid softness in the advertising industry over the past year. The company enjoyed a streak of double-digit year-over-year sales growth across multiple quarters.

Data source: The Trade Desk. YOY = year over year.

The Trade Desk expects this trend to continue in the third quarter, forecasting at least $485 million in revenue. Along with its sales success, The Trade Desk produces excellent free cash flow (FCF). In Q2, the company's FCF reached $119 million, a substantial increase over the $86 million generated the year prior.

The company also possesses a solid balance sheet. Total Q2 assets were $4.3 billion with $1.4 billion of that in cash, cash equivalents, and short-term investments. Total liabilities were $2.3 billion with no debt.

To buy or not to buy The Trade Desk

AI features are just one of the elements that make The Trade Desk a compelling investment. Its platform supports running ads on connected TVs (CTVs), an area of the digital advertising space seeing rapid growth thanks to consumer adoption of streaming services.

Ad dollars that once went to traditional linear television are shifting to CTV. In 2022, CTV ad spending totaled $21 billion, and that number is forecast to nearly double to 41 billion by 2027. Rising CTV ad spending was a key factor in The Trade Desk's Q2 revenue growth. In fact, CTV has been one of the company's fastest-growing channels for the last couple of years.

The Trade Desk also has opportunities to expand internationally. Nearly 70% of global advertising dollars are spent outside North America, yet the company generates only about 10% of its revenue from international customers. This presents the potential for years of revenue growth.

Such opportunities coupled with its strong sales trend, even amid a soft year for advertising, and excellent financial health provide many reasons to consider The Trade Desk as an investment. And then there are the company's AI capabilities. On a recent earnings call, CEO Jeff Green said The Trade Desk's "innovations, especially around the application of AI across our platform, are helping us surface value more intuitively to advertisers."

These factors combine to make The Trade Desk a worthwhile stock to buy.