The Trade Desk (TTD -0.19%) is having a dismal year. Shares dropped more than 30% on Feb. 13 after fiscal fourth-quarter results missed revenue estimates. Then shares dropped nearly 40% on Aug. 8 after second-quarter results failed to impress investors. In total, the stock has tumbled 60% year to date, which makes it the worst performer in the S&P 500.
However, most Wall Street analysts see that as a buying opportunity. The Trade Desk has a median 12-month target price of $75 per share, implying 63% upside from its current share price of $46. But prospective investors should understand the headwinds the company faces before buying the stock.
Here are the important details.
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The Trade Desk is the largest ad-buying platform for the open internet
The Trade Desk operates the leading independent a demand-side platform (DSP), adtech software that helps media buyers plan, measure, and optimize campaigns across digital channels. Independence means it does not own media content or ad inventory that could bias spending on its platform. Instead, its DSP connects media buyers with inventory across the open internet.
The Trade Desk competes with giants like Alphabet's Google, Meta Platforms, and Amazon (NASDAQ: AMZN), but has still secured a leadership position in connected TV (CTV) and offsite retail advertising due to cutting-edge capabilities. Consultancy Frost & Sullivan earlier this year recognized The Trade Desk as the best DSP on the market as measured by growth and innovation, listing artificial intelligence (AI) features as a key strength.
Grand View Research expects adtech spending to increase at 14% annually through 2030. The Trade Desk, as the leading DSP for the open internet, is theoretically well positioned to profit. But intensifying competition with Amazon and a possible decline in ad spending across the open web are headwinds that investors should not overlook.
Amazon is encroaching on areas traditionally dominated by The Trade Desk
Amazon is the third-largest adtech company worldwide and the largest retail advertiser, and its rivalry with The Trade Desk has become increasingly worrisome in recent months. Amazon not only has exclusive CTV inventory (Prime Video) and troves of commerce data, but its online marketplace also supports closed-loop attribution.
Brands often struggle to measure campaigns due to the disconnect between marketing and business results. In other words, it can be difficult to know whether ads are driving sales. The Trade Desk works with numerous retailers to bring measurement data to its platform, but Amazon has an advantage because it owns an e-commerce platform that generates attribution data. That means the company can easily determine whether ads on the marketplace are driving sales.
Additionally, Amazon recently enhanced its DSP with Performance+ and Brand+, campaign optimization tools powered by machine learning models trained on trillions of data points collected from consumer shopping, browsing, and streaming habits. Those tools may help Amazon take share in open web and CTV advertising, markets that have traditionally been led by The Trade Desk.
Morgan Stanley expects ad spending across the open web to decline
The Trade Desk CEO Jeff Green has long argued brands would eventually move away from walled gardens like Google and Meta Platforms. While the open internet is a network of websites and applications across which marketers can run campaigns with the adtech tools of their choosing, a walled garden is an ecosystem where one company owns most of the advertising supply chain.
For example, Google and Meta own ad inventory and consumer data on web properties like Google Search and Facebook. They also own the adtech tools used to run campaigns on those platforms. When one company controls so much of the supply chain, it naturally raises questions about transparency and conflicts of interest. Additionally, insights cannot be carried from one walled garden to another because user identities are not interchangeable.
However, Green may be overestimating the shift away from walled gardens. Despite disadvantages, platforms like Google Search, YouTube, Facebook, and Instagram are extremely relevant to consumers, which makes them indispensable to advertisers. To that end, Morgan Stanley analysts expect ad spending on the open web (excluding CTV) to fall by double-digit percentages in each of the next four years as Google and Meta take share.
The Trade Desk stock is not cheap, but the price is reasonable
The Trade Desk stock has traditionally commanded a premium valuation due to its leadership in open internet advertising. Disappointing financial results and concerns about competition have stripped away much of that premium, but the stock is not yet cheap. That said, the current valuation of 55 times earnings is reasonable for a company whose earnings are forecast to increase at 20% annually over the next three years.
I think investors should consider purchasing a small position today. While concerns about competition are valid, the market tends to overreact to good and bad news. Odds are The Trade Desk stock dropping 60% year to date is an overreaction to some degree. Having said that, shareholders should pay close attention to the company's financial results in the coming quarters, looking for signs of weakness.
