Many investors clearly believe this growth company can sustain its upward trajectory.
Earlier this month, shares of advertising technology (adtech) company The Trade Desk (TTD -5.32%) hit $100 per share. It wasn't an all-time high -- the company hit that in late 2021. But it was the highest the stock has been in two years, which is exciting.
The Trade Desk stock is a little off its high as of this writing. But shares have climbed steadily in recent years, thanks to outstanding business growth. The company's revenue is roughly 10 times greater than it was when it first went public in 2016. And it consistently generates positive free cash flow. Both factors have helped it be a stock market winner.
TTD Revenue (TTM) data by YCharts.
The Trade Desk seems to be unstoppable. Will that stay the case? To answer that, it's best to take a look at the industry it's in, the company's business model, and some other relevant numbers.
Here's why The Trade Desk is so successful
The Trade Desk is a programmatic adtech software company. According to eMarketer, programmatic advertising is "Any ad that is transacted or fulfilled via automation." In other words, many of the digital ads people are exposed to are placed there automatically, rather than being a fixed ad placed there by a human decision-maker.
The benefit with a system like this is that publishers can display ads that are targeted to a desired audience. Because it's targeted, the chance of getting good results for advertisers is high. And because advertisers are competing behind the scenes to get that ad spot in real time, the rates these publishers can charge are higher, in theory.
When it comes to digital advertising, eMarketer is the outfit to talk to. It regularly tracks industry sales data and gives forecasts, which are helpful. In 2024, it expects nearly 16% growth for programmatic ad spend, lifting the size of the market to $157 billion. Much of this growth is coming from connected TV (CTV) -- TV programming delivered over an internet connection.
The Trade Desk specializes in this space and has consequently benefited from the industry growth -- it was in the right place at the right time. Advertisers use the company's software to place automatic bids on ad spaces. The company also provides the ability to target and monitor ad effectiveness, which is something in high demand.
According to management, growth in CTV revenue was the main growth driver for The Trade Desk in the first quarter of 2024, as has been the trend. This makes sense given the general tailwind for CTV advertising. But the company benefits from programmatic ad growth in other areas as well.
The Trade Desk claims to be the largest adtech company that does what it does -- it's a demand-side platform. But even though it's the biggest, the company only has $2 billion in trailing 12-month revenue. That's a small sliver of the market and gives it plenty of room for ongoing growth.
To be clear, it's reasonable to expect growth from here. Not only is the industry growing, as eMarketer points out, but The Trade Desk has some good things going. Large digital advertising companies are phasing out third-party tracking data, potentially making The Trade Desk and its first-party data more relevant than ever to advertisers. This is the data used to improve targeting and boost effectiveness. Moreover, management claims that its artificial intelligence (AI) software is improving its targeting capabilities.
What should investors do?
I believe The Trade Desk could be an unstoppable business for years to come. The industry's growth seems to be sustainable in the long term, and the company is riding the trend higher thanks to its own merits. I don't believe this trajectory will be stopped.
That said, The Trade Desk stock is richly valued at about 23 times its trailing sales.
This is called valuation risk. The Trade Desk is richly valued because of the quality of its business and its growth prospects. But if anything were to ever happen with investors' perceptions of the company's quality or if growth unexpectedly slowed, the valuation would likely come down and cause the stock to underperform.
However, investors might not necessarily want to wait for cheap valuation for The Trade Desk stock. As the chart below shows, the market has sustained this lofty valuation for some time.
TTD PS Ratio data by YCharts.
For investors who believe this is a strong growth industry and that The Trade Desk is a top company, the better option may be to dollar-cost average when buying shares. This method invests money gradually over a period of time. That way, the money is spread out in case a stock suddenly drops lower.
By dollar-cost averaging, investors can get The Trade Desk stock for an average price, rather than risk investing everything at an expensive peak. This could be a good way to get exposure to this unstoppable growth stock.
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.
