The Trade Desk (TTD 1.72%) has fallen 81% from its record high, but most Wall Street analysts view the stock as deeply undervalued. In fact, the median target price of $50 per share implies 85% upside from its current share price of $27.
Here's what investors should know.
Image source: Getty Images.
The bull case for The Trade Desk
The Trade Desk operates a demand-side platform (DSP), a type of adtech software that helps media buyers plan, measure, and optimize data-driven campaigns across digital channels. The most recent version of its DSP, called Kokai, leans on artificial intelligence (AI) to manage budgets, customize bids, and dynamically target audiences.
The investment thesis for The Trade Desk revolves around its independent business model, meaning it does not own media content that might bias ad spending on its platform. That distinguishes the company from Alphabet, Meta Platforms, and Amazon, which have a clear incentive to steer ad buyers toward their own inventory (e.g. Google, Instagram, Prime Video).
In short, The Trade Desk avoids conflicts of interest inherent to adtech companies that own media content. In turn, publishers are more likely to share data with The Trade Desk, which arguably makes its measurement tools more effective when analyzing campaigns across the open internet (i.e., the decentralized network of websites and applications not owned by technology giants).
The Trade Desk's objectivity is an important selling point for buyers of advertising, so much so that it has become the most popular DSP for the open internet. The company has a particularly strong presence in connected TV (CTV) advertising and off-site retail advertising, two of the fastest-growing verticals of the broader digital advertising market.
The bear case for The Trade Desk
The advent of generative AI tools has changed the way consumers engage with the internet. They are increasingly likely to get answers directly from applications like ChatGPT or Gemini rather than click through to websites. Consequently, Morgan Stanley analysts expect open internet ad spending to slow, with growth falling from about 25% in 2024 to about 5% in 2028.
Meanwhile, The Trade Desk charges much higher fees than some competitors, generally 15% to 20% of ad spending on its platform, according to eMarketer. Comparatively, Amazon charges less than 10% (sometimes as little as 1%), and AppLovin earns most of its revenue on a performance basis, in which case it collects fees only when ads drive outcomes like downloads or purchases.
Collectively, those headwinds have led to a string of disappointing financial results. In the third quarter, The Trade Desk's revenue increased 18%, down from 27% in the same period last year. Equally concerning, several larger competitors reported stronger revenue growth in the same quarter, as detailed below:
- Amazon: 24%
- Meta Platforms: 26%
- AppLovin: 68%
Buyers of advertising are increasingly prioritising walled gardens (i.e., closed ecosystems controlled by companies like Google, Meta, and Amazon) because they expect a greater return on investment on those platforms. Additionally, the technology giants mentioned also have more money to invest in AI tools that automate ad workflows.
NASDAQ: TTD
Key Data Points
The Trade Desk stock looks cheap at its current price
Wall Street expects The Trade Desk's adjusted earnings to grow at 15% annually through 2027. That makes the current valuation of 15 times earnings look fairly cheap, especially when the company beat the consensus earnings estimate in the last six quarters.
With the stock down 81% from its high, I think investors can buy a small position today. But The Trade Desk is battling headwinds on several fronts, and the company's best days may be in the past. I say that as someone who has owned shares since 2017.
