Shares of digital advertising platform The Trade Desk (TTD 1.67%) have once again soared higher on investor optimism. The last five years have been epic, delivering longtime shareholders a more than 300% return. But since the aftermath of the pandemic, The Trade Desk stock has been stuck in volatile but mostly sideways price action.
Blame a sky-high valuation for this performance the last few years. However, if recent history is any guide, just a bit of patience could be rewarded.
2024 starts with a bang
The Trade Desk's revenue grew 23% year over year in 2023, building on its massive outperformance of the digital ads marketplace overall. As I wrote about a few times last year, The Trade Desk's demand-side platform (or DSP, which works with marketers and the brands they represent) has some key factors working in its favor -- especially versus the sell-side platforms (or SSP, which work with publishers that sell ad inventory) like Pubmatic and Magnite.
Data by YCharts.
For one, publisher inventory is higher than ad purchasing demand, so a DSP like The Trade Desk gets the benefit of economic scarcity. Also, as CEO Jeff Green pointed out on the last earnings call, The Trade Desk partners with its customers to unlock value, rather than competing with customers with their own ad inventory (like Alphabet's Google and Meta's Facebook and Instagram do). And these marketers and the brands they represent have a great deal of qualified and authenticated data on their audiences. Green explained:
In general, the current shifts [in the advertising market] will help companies with authenticated users and traffic, which also sit next to large amounts of advertiser demand. These macro changes hurt those, especially content owners and publishers who don't have authentication. ... And for those who are prepared, like The Trade Desk, it is an opportunity to win share. Our platform is set up to make the most of any signal that can help advertisers drive relevance and value.
In other words, The Trade Desk is a trusted partner to a world of marketers and their customers looking to make the most of digital ads -- often for the first time.
The digital ad industry is expected to accelerate in 2024 after a couple tough years during the bear market, and it could equate to further gains for The Trade Desk. The Q1 2024 outlook (the first quarter of each year tends to be seasonally slow) implies revenue will increase about 25% year over year. That keeps this business among the top performers in the digital ads industry.
But what about the stock?
Things get dicey when looking at the stock's valuation. After some hefty stock awards for co-founder and CEO Green in the last couple years, The Trade Desk is only just beginning to reach generally accepted accounting principles (GAAP) profitability. Net income was $179 million last year, a net profit margin of just 9%.
As a result, many investors may find the premium of over 220 times trailing-12-month earnings per share hard to comprehend, though on a free-cash-flow (FCF) basis, the stock trades for a more "reasonable" 75 times trailing-12-month FCF.
Clearly, investors are betting on rapid growth and higher profit margins to be the norm for The Trade Desk for years to come. But as you can see from the above stock chart for the last few years, the rich price tag can cause some wild swings in price. It isn't too late to buy. If you're waiting for a pullback before making a purchase, time could be on your side.
For most investors, though, timing is hard (and that's an understatement). Plus, there's always the psychology of thinking "just a little lower" before placing that intended buy for a stock. So if you like The Trade Desk's prospects for the long term, consider utilizing a dollar-cost averaging plan to build a position gradually, and remove the tedious work of watching the stock price from the equation.
But if you prefer to wait for a pullback anyway, don't expect this stock to get cheap anytime soon. All indications are that this business model is built to keep gradually eating up market share as advertisers look for the best way to migrate to digital, without feeding all the profit from their ad campaigns to the tech giants. A premium valuation is to be expected. At the very least, The Trade Desk deserves a spot on your watch list.
