Many technologies or trends come and go, and who knows if artificial intelligence (AI) will be one of them. I'm confident it is here to stay, as technology has been moving toward powerful AI models for a while, but there's always the chance it is just a fad.
However, one practice that has stuck around for thousands of years is advertising. Advertising has been around for a long time, although it has taken various forms. The trend is to consume ads digitally, as website margins (like in this article), streaming services, or phone apps have ads tailored to you. This is a more effective form of advertising than a newspaper, as it directly targets a consumer with known tastes and preferences.
One company behind this trend is The Trade Desk (TTD 1.67%), which is also using AI to ensure that ad campaigns are effective. It also looks like a great buy right now, thanks to a recent pullback that puts the stock at a discounted price.
Digital advertising is The Trade Desk's bread and butter
There are two sides to advertising: the buy and sell side. The sell-side platform has advertising space to sell, whether it's a newspaper section or a few seconds between streaming songs. The buy side is the advertisers looking to for the best place to reach customers to persuade them to purchase their products. The Trade Desk solely operates on the buy side.
The Trade Desk uses a bidding system to decide how much to pay for ads and multiple factors to increase or decrease those bids. Because it doesn't benefit from the sell side, it doesn't have any biases when choosing where to advertise.
The Trade Desk also knows that many people think targeted ads are sometimes creepy, as they seem to know exactly what a person is thinking. There's also concern about personal data being associated with these profiles, so The Trade Desk came up with a solution.
Unified ID 2.0 (UID2) is the Trade Desk's open-source model, which builds an anonymous ID associated with an email address. This protects anyone from associating the ID with the user, keeping information safe. It also has the added benefit of providing more accurate information, as the ad profile is maintained on devices like TVs with no search history to tailor ads. Instead, it relies on the email address associated with the account, which makes connected TV a massive business for The Trade Desk.
The Trade Desk is also a power user of AI, as can be seen through its Koa product. Koa is used to optimize an ad campaign's performance by tweaking ad type, geography, or the target audience. This allows the platform to automatically optimize the ads using data rather than a gut-feel approach.
This results in one of the best buy-side platforms available, and the business success is reflected in that.
The stock is expensive but is executing at a high level
The Trade Desk is also strong financially, with its growing revenue 23% year over year to $606 million in the fourth quarter. Additionally, it converted $97 million of that figure into net income, giving it a 16% profit margin. The business isn't optimized for profits yet, so expect this margin to tick up as The Trade Desk matures as a company.
It also gave strong guidance of $478 million for the first quarter, indicating 25% growth. Despite that, The Trade Desk's stock is down over 10% from when it announced these impressive results.
As a result, The Trade Desk's stock can be purchased for about 20 times sales.
TTD PS Ratio data by YCharts
That's still an expensive stock, but it is far cheaper than it was over the past few years.
We're still in the early innings of optimizing advertising for a digital environment, and The Trade Desk has shown it can adapt to any technology changes. A hundred years from now, many of the things we do may be outdated, but advertising will not be one of them. Because of that, I'm confident The Trade Desk will continue to be a top-performing stock over the next decade or longer.
