TheTradeDesk stock rally isn’t done yet

The digital ads market has experienced a remarkable rebound this year, thanks to the resilient US economy defying expectations and showing no signs of recession. This economic strength has propelled digital advertising titans like Meta ($META) and Google ($GOOG) into a robust comeback. Meta's stock has impressively surged by 167% YTD, while Google's shares have rallied more than 50%.

But what about their performance over the past five years? Over this period, Google has seen a substantial gain of 144%, while Meta has risen by a respectable 103%. While these returns are undoubtedly strong, they pale in comparison to the remarkable performance of The Trade Desk ($TTD), one of the fastest-growing digital advertising platforms worldwide. TTD's stock has skyrocketed by 560% over the same five-year span, cementing its status as one of the market's top-performing stocks.

TTD has left other ad-tech names in the dust, and there's no indication that its remarkable performance will wane anytime soon. The company is rapidly gaining market share in the large and growing digital ads landscape, driven by relentless innovation that positions it as a frontrunner in a cookieless world. While the stock may not come cheap, the rally seems poised to continue. Here's why.

Building the Ad Targeting Ecosystem for the Cookieless World

When Google first announced its intention to phase out cookies, it sent shockwaves through the digital advertising community. Cookies are an essential tool for tracking user behavior online and have long been a linchpin of the digital advertising industry. In an age where data reigns supreme, the demise of cookies presented a significant challenge for marketers and advertisers. However, as the saying goes, when one door closes, another opens, and this is where The Trade Desk (TTD) steps in.

As Google signaled the end of the cookie era, The Trade Desk recognized an opportunity to innovate and reshape the digital advertising landscape. In 2021, it introduced Unified ID 2.0, an open-source digital identifier designed to support advertising while respecting user privacy. Unified ID 2.0 empowers advertisers to target users with personalized ads while maintaining data security and adhering to strict privacy regulations. It was designed to be transparent, open, and independent – a stark departure from the black-box algorithms used by large ad tech giants like Google and Meta, which TTD execs refer to as 'walled gardens.'

Although TTD won't directly benefit from UID2 due to its open-source nature, it positions the company as one of the top players and innovators in the digital advertising space. This technology supports the open internet, which relies on personalized ads, and as a result, it indirectly benefits TTD.

TTD operates in a high-growth industry, and its ongoing innovation will fuel rapid growth and continued market share gains for the foreseeable future. The global digital advertising market is projected to grow by 7.57% between 2023 and 2027, reaching a market volume of $910.30 billion. In 2022, the marketing spend on TTD's platform amounted to $7.7 billion, translating to a global market share of 1.25%. In other words, TTD boasts significant growth prospects due to its low market share and the vast digital advertising market.

In addition to UID2, TTD has recently introduced new technologies that enhance its platform's appeal to ad agencies and companies. One important addition is Kokai—a Japanese term meaning "open for business" or "open waters." Kokai is an AI-powered platform designed to drive precision, relevance, and certainty in advertising efforts. It leverages deep learning algorithms to assist advertisers in making more informed decisions about their campaigns, from planning to execution.

Kokai stands out from other programmatic AI platforms thanks to its ability to process massive amounts of data in real time, enabling highly accurate predictions about individual users and impressions.

Another key feature of Kokai is its capacity to learn and adapt over time. As it processes more data, it becomes increasingly proficient at understanding the relationships between different variables, ultimately delivering more accurate predictions and better results for advertisers.

Rapid Growth at Scale

Despite being a multibillion-dollar adtech giant—having generated $1.6 billion in revenue in 2022—TTD operates in a digital advertising market so vast that it allows the company to grow rapidly. In Q2, revenue grew 23% y/y to $464 million, exceeding analyst estimates by $9 million. This was an acceleration from the 21% y/y growth seen in Q1, underscoring TTD's robust growth momentum at scale.

While TTD is platform-agnostic, meaning customers can purchase ads for any platform, the primary growth driver is Connected TV (CTV). CTV advertising offers brands access to a goldmine of streaming viewership, whether through smart TVs, gaming consoles, or streaming sticks, presenting a wealth of opportunities for advertisers to engage with their audiences. TTD's comprehensive suite of tools and integrations provides advertisers with a streamlined gateway to the growing CTV ecosystem.

Given the ongoing cord-cutting trends, CTV will likely remain TTD's primary growth driver for the foreseeable future. Millennials and younger generations have been at the forefront of cord-cutting, embracing streaming services as their primary source of entertainment. These digital natives have shifted away from the rigid schedules and limited content offered by traditional TV in favor of the flexibility and extensive libraries provided by CTV platforms. In fact, cord-cutting reached a new peak in Q1 2023, with US cable, satellite, and internet TV services collectively losing 2.3 million subscribers. As one of the most popular platforms for purchasing CTV ads, TTD is well-positioned to capitalize on these ongoing trends, supporting its rapid growth for years to come.

TTD's success is not only attributed to rapid growth but also to deep profitability. In Q2, its adjusted profit came in at $139 million, up 42% y/y. As you can see, earnings increased significantly faster than revenues during the quarter, as total operating expenses grew by just 12.6% y/y. This highlights the scalability of TTD's platforms, potentially leading to even higher profit margins in the future. It already boasts adjusted income margins of around 30%, but the company's financial performance suggests that margins can continue to rise.

What About Valuation

Historically, TTD has been an expensive tech stock, with investors rewarding the company for its outstanding performance. This year, the stock has surged by 92%, leading to a significant increase in the company's valuation multiple. At the current stock price of around $86 per share, TTD trades at a PS ratio of 24.3x, making it one of the most expensive tech names on the market. However, the company’s strong growth momentum and deep profitability justify its premium valuation.

Assuming that TTD's impressive performance continues, as there's no indication to the contrary, and TTD's PS ratio increases to 25x, the stock could rise by 15% from its current prices to reach $100.

What Else

TTD is a unique company in the ad tech space. It operates in an industry expected to expand in the coming years, and its focus on innovation positions it well for this growth. The company is also well-positioned to increase its market share in the cookieless world, as more advertisers turn to its AI-powered platform for efficient growth. The digital advertising industry continues to evolve, and TTD has proven its ability to adapt quickly and capitalize on the latest trends and technologies.

THE TRADE DESK RATING

Short Term: Buy

Long Term: Buy

🎯 12-Month Price Target: $100

Personal Portfolio Update

Subscribe to Premium Membership to read the rest.