When it comes to growth stocks, few companies have performed as well as The Trade Desk (NASDAQ: TTD). The stock is up 50% in 2020 while the S&P 500, Dow Jones and NASDAQ have generated returns of -7.6%, -13% and 7.3% respectively this year.
TTD has returned over 2,000% since its IPO in September 2016. This means a $1,000 investment in The Trade Desk stock would now be worth $21,610.
So, why has TTD crushed the broader markets in the last few years? Here, we take a look at the company’s business model that has driven top-line growth as well as its long-term prospects.
A programmatic advertising giant
The Trade Desk is a company in the programmatic advertising space that aims to empower ad buyers. Its cloud-based platform helps ad buyers create, manage, and optimize data-driven digital ad campaigns across ad formats including display, audio, video, and social. Ad buyers can do so on a multitude of platforms and devices such as personal computers, mobile devices and connect TV.
TTD’s focus on integrating data, ad inventory and publisher partners ensures maximum reach and accelerates the decision-making capabilities of enterprises. TTD empowers ad buyers and provides them with an omnichannel software platform to manage integrated ad campaigns.
It exclusively focuses on ad-buyers as it believes that currently the supply of digital ad inventory far outpaces demand. This business also avoids an inherent conflict of interest that exists while serving both buy-side and sell-side clients. The Trade Desk’s platform benefits ad buyers by providing a comprehensive data-driven solution to optimize digital campaigns.
TTD is part of a rapidly expanding market. According to Reportlinker, the global programmatic advertising markets is estimated to grow from $2.4 billion in 2018 to $5.1 billion in 2025, indicating an annual growth rate of 11.4%.
Further, the number of internet users have exploded in the past decade and companies are increasingly dependent on digital ads to target consumers. In the U.S., digital ad spend will outpace traditional ad spend for the first time in 2020. A Digital Media Solutions report states while total ad spend will rise 6.5% in the U.S., digital ad will account for 53% of total ad spend and grow by 12.4%.
However, the growth in digital media has also accelerated audience fragmentation and a growing long tail of mobile apps, media players and digital platforms present advertisers a challenge to reach a large audience. TTD solutions aim to simplify this problem by consolidating media buying options for agencies and enterprises.
A look at TTD’s numbers
TTD is growing at a far higher pace than the digital ad market. Its sales have increased from $113.83 million in 2015 to $661 million in 2019. Due to the COVID-19 pandemic, the decline in enterprise ad-spending will likely have a significant impact on TTD’s top-line. Analysts covering the company, expect sales to grow by just 4.1% to $688.4 million in 2020. However, the COVID-19 pandemic is likely to be a near-term headwind and TTD sales are forecast to grow by 35.3% to $931.63 million in 2021.
The Trade Desk is looking to expand into international markets and drive top-line growth as the global opportunity for programmatic ads remain significant. To gain a strong foothold in Asia’s growing markets. The Trade Desk launched an advertising partnership with China’s TikTok.
This partnership will allow ad buyers to directly access premium TikTok inventory across the Asia-Pacific region via TTD’s platform. TikTok is in fact the first short-form video platform to integrate ad offerings with The Trade Desk. Pepsi (NASDAQ: PEP) was the first client to access TikTok’s inventory via TTD and the latter aims to expand client partnerships as its ad solutions continue to scale.
TTD stock is trading at an expensive valuation. Its forward price to sales multiple is high at 28x while the price to earnings multiple is close to 150x. However due to its stellar growth metrics, TTD commands a higher valuation. The shift to digital ad and the company’s enviable growth rates make it an exciting bet for long-term investors.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
