Programmatic digital advertising provider The Trade Desk (TTD -1.46%) is the latest company to join the S&P 500 index, doing so on July 18. The addition explains why shares of the company shot up an impressive 6% on the day following the announcement that it would join.
The spike isn't surprising; The Trade Desk's entry into the S&P 500 is a testament to the company's solid profitability and liquidity in the past four quarters. Moreover, the addition to the index has led to an increase in demand for a stock from passive investors and index funds because of a phenomenon called the "index effect."
It is worth noting that The Trade Desk was selected to join the S&P 500 over popular names such as Robinhood Markets, AppLovin, Interactive Brokers, and others. It will be replacing Ansys in the index (Ansys was acquired by Synopsys). However, investors may now be wondering if it makes sense to buy The Trade Desk stock as it has shot up more than 59% in the space of just three months as of this writing.
Let's see if it is a good idea to buy The Trade Desk following its inclusion in the S&P 500.
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The Trade Desk's valuation makes it an expensive stock to buy right now
The Trade Desk's recent rally has brought the stock's price-to-earnings (P/E) ratio to 97 as of this writing. That's nearly triple the tech-laden Nasdaq-100 index's average earnings multiple. The forward earnings multiple of 45, though far lower than the trailing multiple, is still on the expensive side.
Investors, therefore, will have to pay a huge premium if they are looking to buy the stock right now. For a company that's expected to deliver an increase of just 7% in earnings this year, The Trade Desk seems too richly valued to buy right now. But then, growth-oriented investors will do well to note that the company is operating in a fast-growing market that benefits from the rapid adoption of artificial intelligence (AI) tools.
A huge addressable opportunity could help the stock maintain its momentum
According to one estimate, the programmatic advertising market that The Trade Desk serves could grow by 10x between 2024 and 2033, generating a whopping $236 billion in revenue at the end of the forecast period. The Trade Desk has generated just under $2.6 billion in revenue in the past 12 months, indicating that it still has massive room for growth over the next decade.
An important point to note here is that The Trade Desk's growth is better than that of large competitors such as Meta Platforms and Alphabet. The company reported a 25% year-over-year increase in revenue in Q1, which was well above the 16% growth in Meta's advertising business during the same quarter. Alphabet's Google advertising business, on the other hand, grew at a much slower pace of 8% in Q1.
Of course, The Trade Desk is a much smaller company right now, but its robust growth suggests that it is gradually making its presence felt in the multibillion-dollar digital ad market. The company's AI tools are playing a central role in helping it register a robust growth rate, with two-thirds of its customer base currently using its Kokai programmatic advertising platform.
The company points out that Kokai analyzes 17 million real-time opportunities every second to help advertisers and brands buy relevant ad inventory that can be served across different channels such as video, audio, display, social, connected TVs, and others. The data-driven advertising enables The Trade Desk to optimize campaigns so that its customers can generate higher returns on the ad dollars they spend.
The Trade Desk claims that its clients who are using Kokai have seen a 42% drop in cost per unique reach, a metric that refers to the amount spent to reach a unique individual through an advertisement. Not surprisingly, the company says that its "active contract negotiations are at all-time highs." All this indicates that The Trade Desk's growth could pick up pace in the future.
Consensus estimates, for instance, project its bottom-line growth rate to nearly triple to 20% in 2026 as compared to this year. The Trade Desk has the potential to maintain an upward earnings growth trajectory, as it expects the cost savings achieved by advertisers using its platform to be reinvested back into advertising campaigns.
As such, don't be surprised to see an uptick in The Trade Desk's earnings growth in the long run, suggesting that the company has the ability to justify its valuation. That's why this tech stock could still attract growth investors even after the handsome gains it has clocked lately.
