Advertising is a pillar of the economy. Ad money is slowly shifting from old-fashioned mediums like print, radio, and broadcast television to digital ones, like the internet and streaming. This trend positions The Trade Desk (TTD 3.12%) as a big winner over the coming decades. The stock has already outperformed the market since going public, but there's plenty more upside ahead.
The Trade Desk is worth nearly $42 billion today, so it's not exactly flying under the radar anymore.
Still, the stock has enough growth opportunities to help make millionaires out of long-term investors, as long as it's part of a diversified portfolio.
Here is why.
Tearing down the walled gardens
Google (owned by Alphabet), Amazon, and Meta Platforms dominate today's digital advertising landscape. In 2022, the three combined for approximately three-quarters of all digital ad spending. These companies are enormous and have billions of customers. That gives them leverage to operate controlled advertising ecosystems, often called walled gardens. The problem with walled gardens is that there is little transparency or control for advertisers. Your ads use the system's customer data, which stays there. You play by their rules.
NASDAQ: TTD
Key Data Points
The Trade Desk represents an alternative. It's an independent programmatic digital advertising platform. Simply put, it's an automated system that matches ads with an ideal place and audience. These places could be websites, videos, or streaming platforms. The Trade Desk uses first- and third-party data to match ads with an audience based on their demographics or behaviors. Most importantly, it offers transparency and control to ad-buying customers.
Years of steady growth ahead
Advertising can be somewhat cyclical because companies pull back ad budgets during recessions. You can see that The Trade Desk felt a minor hit in 2020 during the height of the COVID-19 pandemic. But overall, the growth of digital has fueled a smooth trajectory to over $2 billion in annual revenue. Notably, the business is very profitable. The Trade Desk generates generally accepted accounting principles (GAAP) earnings, and the business converts over a quarter of its revenue into cash flow.
Management began repurchasing stock last year; it caused the company's share count to peak (stock-based compensation) and slightly decline.
Investors could be looking at a future "cannibal," a profitable company that continually spends on repurchases to lower its share count and drive higher earnings growth (and share prices).
TTD Revenue (TTM) data by YCharts
The share repurchases signal that The Trade Desk generates more profits than it needs to invest in the business. But its growth days are nowhere near over. Spending on The Trade Desk's platform grew 24% in 2023 to $9.6 billion. That's a fraction of the $135 billion spent worldwide on digital ads (excluding search and social media). It's 1% of the global ad market with $900 billion of annual sales in total.
So, The Trade Desk enjoys multiple growth tailwinds:
- The ad market itself should grow with the global economy.
- More ad dollars should shift to digital formats over time.
- The Trade Desk can take market share from walled garden competitors.
Long story short, The Trade Desk story is still in its early chapters.
Get rich slowly
It's hard to look at the stock today and call it a bargain. Shares trade at nearly 60 times its estimated 2024 earnings. On the other hand, analysts believe The Trade Desk will grow earnings by 23% annually over the next three to five years. At that growth, the stock isn't so expensive that shares will take long to grow into their valuation.
Overall, the ingredients are there for enough years of double-digit earnings growth to create vast wealth over the coming decade and beyond. The industry tailwinds of digital advertising are blowing strong, and The Trade Desk could amplify investor returns by unleashing more significant share repurchases as its cash flow grows. Remember, investors should be playing the long-term game. The Trade Desk is a $42 billion company already.
That said, The Trade Desk is a top-notch technology company with the fundamentals to make the stock a great get-rich-slowly addition to any long-term portfolio.
