Buy The Trade Desk Stock on Dips Heading Into 2020

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Programmatic advertising leader The Trade Desk (NASDAQ:TTD) is one of those stocks that investors should buy and hold for the long haul. It’s a high-growth company, with a leadership position in a high-growth industry and huge, non-cyclical tailwinds which should generate high growth for a long time. Meanwhile, it also has a high gross-margin business, so its rapid revenue growth should drive very high profit growth in the long-run.

STARS Stocks to Buy for the Long Run: The Trade Desk (TTD)

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As go profits, so go stocks. The Trade Desk’s profits will surge higher over the next five to ten years. So will TTD stock. That’s why I named TTD stock one of the five best tech stocks to buy and hold for the long haul. It’s also why I named TTD stock as one of my five favorite tech stocks to buy for the next decade.

All in all, TTD stock is a great addition to long-term portfolios.

Having said that, price matters, even for high-growth stocks that look poised to deliver big long-term returns. And, right now, the price of TTD stock is pretty high. That is, its shares seem fully valued and are trading exactly where they should be heading into the end of 2019.

I don’t like to buy stocks at fair value. I like to buy them below their fair value. So, with TTD stock on the heels of an enormous 120% 2019 rally, I’m not chasing the stock up here.

Instead, I’ll let the stock cool down. Inevitably, it will. When it does, that will be the time to buy it because this stock will make its way towards $300 in 2020.

The Trade Desk Is a Long-Term Winner

The background and fundamentals of The Trade Desk make it a long-term winner.

The Trade Desk is an ad-tech company that has created a demand-side platform (DSP) which programmatically buys and sells ads for advertisers. DSP uses data, machine learning, and algorithms to carry out those tasks. At first glance, that may sound complex. But the underlying idea is pretty simple. In the old days, advertisers had to sit down, think about where to put their ad dollars, have human-to-human negotiations with ad platforms, and then — after all that — finally put their ad dollars to work. This arduous, labor-intensive process had to be repeated every time new ads were placed and ad budgets were adjusted.

The Trade Desk has automated this process. As a result, the process has become much simpler, smarter, faster, and cheaper. There’s no more thinking about where to put ad dollars. The Trade Desk’s data answers those questions. There’s no more human-to-human negotiations. The Trade Desk programmatically buys ads. Tasks don’t have to be repeated. The Trade Desk dynamically adjusts ad campaigns based on real-time data.

In other words, The Trade Desk simply makes advertising easier and better for ad buyers. Because of that, more and more companies are pivoting bigger and bigger chunks of their ad budgets onto The Trade Desk.

That pivot will continue for three main reasons.

First, The Trade Desk services the digital ad market, and many ad dollars continue to shift into the digital ad market. Second, automation technology is only scratching the surface of its potential. In the 2020s, it will get better and go more mainstream. As it does, programmatic advertising will become the norm across the entire digital ad landscape. Third, open internet initiatives are gaining traction. As they do,  more companies will use third-party DSPs — like TTD — as opposed to using in-house DSPs.

In short, The Trade Desk is a high-growth company whose growth should remain strong for a long time.

The Trade Desk Stock is Going Higher

Propelled by favorable non-cyclical growth trends, The Trade Desk stock will march higher in the long run. But its gains over the next few months are likely to be limited.

The Trade Desk’s revenue is rising at a 30%-plus rate. Gross ad spending on the platform came to less than 1% of total digital ad spending in 2018. The non-cyclical  positive catalysts of programmatic advertising and the open internet indicate that TTD’s share of gross ad spending will continue to expand at a steady rate over the next few years. It has been expanding roughly 0.15 percentage points per year since 2016. That trend will likely persist into 2025.

Assuming the trend does continue and given that the digital ad market is growing by double-digit percentage levels, the company’s top line should increase 20%-25%.

Its gross margins are up near 80%. They should stay there for the foreseeable future, since the gross margins of most ad tech companies are around that level. Meanwhile, sustained 20%-25% revenue growth should be enough to increase the profitability of the company’s revenue, pushing the operating spending rate down towards a more normal 40%-45% level by 2025.

Putting all that together, my modeling calls for The Trade Desk’s earnings per share to reach roughly $12 in 2025. Based on a 35-times forward earnings multiple, which is average for application software stocks with low capital spending rates, that equates to a 2024 price target for TTD stock of $420. Discounted back by 10% per year, that yields a 2019 price target of $260 and a 2020 price target of over $285.

The Bottom Line on TTD Stock

TTD stock is a long-term winner, supported by non-cyclical positive growth catalysts, a favorable financial profile, and huge profit growth prospects. Having said that, a lot of the good stuff is already fully priced into TTD stock today. So, there’s no rush to buy the shares at their current price of $255.

But if or when TTD stock starts to drop, that will be the time to buy the shares. In 2020, TTD will make a run towards $300.

As of this writing, Luke Lango was long TTD. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/buy-the-trade-desk-stock-on-dips-heading-into-2020/.

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