This business is on the right side of advertising trends and shifts in consumer behavior.
If you're considering buying The Trade Desk (TTD 0.98%) stock, it's because you want to make money. After all, the only real reason to invest money now is in hopes of having more money later.
This logic can be taken a step further: It's relatively easy to make money in the stock market by investing in an S&P 500 index fund. People usually think of this index when they say "the stock market." And the stock market generally goes up in value by about 10% annually. So, the only real reason to buy The Trade Desk stock is in hopes of gaining better than 10% annual returns over the long term.
Is this a reasonable expectation for investors looking at The Trade Desk stock today? It may indeed be reasonable, as I'll explain.
Why The Trade Desk is a great business
People consume tons of digital content these days. According to The Trade Desk, people listen to three hours of audio every day, which includes music, podcasts, and other things. Moreover, people stream hours of digital video content daily as well. Much of this digital audio and video content is monetized with advertising, providing a lucrative opportunity for a digital advertising technology (adtech) company like The Trade Desk.
Ad agencies and brands are among those looking to digital channels to reach potential customers. And The Trade Desk boasts that its technology allows those agencies and brands to boost sales while reducing advertising costs, a big win for businesses.
The Trade Desk consistently grows its revenues by more than 20%, even though the industry isn't growing anywhere near that fast. And part of the reason for this may be how it delivers wins for its customers. The company spearheaded an initiative called Unified ID 2.0, allowing adtech platforms and brands to combine third-party and first-party consumer data in a way that still protects privacy. Basically, all this data is what The Trade Desk uses to ensure the right ads are put in front of the right people at the right time.
When the system works, advertisers naturally look to move dollars from other channels toward The Trade Desk, which is why it's growing so fast.Indeed, The Trade Desk is a growth machine, with revenues soaring at a consistently strong pace, as the chart below shows.
TTD Revenue (Quarterly YoY Growth) data by YCharts. YoY = year over year. TTM = trailing 12 months.
According to management, The Trade Desk is chasing a $900 billion opportunity. For perspective, brands spent less than $10 billion on the platform in 2023, so if things go right, this business could still grow by leaps and bounds in the coming years.
What about the investment opportunity?
I think it's reasonable to expect The Trade Desk's business to grow substantially for the foreseeable future. But the investment community seems to expect this, too, as evidenced by the stock being bid up to a very expensive valuation. As the chart below shows, The Trade Desk stock trades at nearly 24 times sales and at over 100 times its free cash flow -- both extremely high.
TTD PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Valuing a stock is complicated, and valuations fluctuate higher and lower over short periods. But given the already high valuation for The Trade Desk stock, I'd bet the valuation will trend lower over the nearer term if anything. Therefore, the stock may take a breather in the short term.
However, stocks can outgrow pricey valuations over the long term, and The Trade Desk is growing at an impressive pace and chasing a big opportunity. So, investors can make money, but it may take time.
As of this writing, The Trade Desk has a market capitalization of just over $50 billion. Assuming the stock modestly outperforms the average returns for the S&P 500, the stock would be pushing a $100 billion valuation five years from now. But given just how quickly it's growing and the size of its market, this business could realistically be worth $100 billion by then.
In closing,given the lofty valuation, I wouldn't personally allocate a large percentage of my portfolio's valuation to The Trade Desk stock if I were to buy shares today. But I believe it could still be a stock to buy and add to a portfolio because it's a great business poised for a lot of growth for years to come.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends The Trade Desk. The Motley Fool has a disclosure policy.
