It’s been 40 months since The Trade Desk (NASDAQ:TTD) went public at $18 per share. Yesterday TTD stock closed at $289, up 1,500% since its September 2016 IPO. In the last 12 months, TTD has jumped 121%.
Can you say “momentum?”
The scariest part of purchasing The Trade Desk stock at this point in the company’s development is knowing it’s run a very long way in a short period. With value stocks making a comeback due to lofty stock valuations, it’s hard to pull the trigger on a stock that trades for more than 22 times its sales.
But there is a plausible scenario in which TTD stock will hit $1,285 within the next 40 months.
The Digital Ad Business Continues to Change
Although this is the first time I’ve written I’ve known about TTD, I’ve known about the company for some time through a friend who’s an IT professional and works for a company in the advertising sector. On several occasions over the past year, I’ve asked him about TTD’s business and business model.
Color me intrigued.
Additionally, several of my cousins have worked on the buy side of the ad business, so I’ve long wondered how the traditional ad agencies would overcome Google and Facebook (NASDAQ:FB).
The Trade Desk appears to be part of the solution to that problem., which has become very important as advertising continues to transition from print to digital.
Another InvestorPlace contributor, Luke Lango, think that TTD will have a great year in 2020, but he estimates that TTD stock will only appreciate by 20% in the next 12 months.
Lango is upbeat about The Trade Desk’s potential because it’s currently increasing its revenue by 30% per year in a digital ad market that’s growing by more than 20% annually. It’s participating in a non–cyclical trend.
“Digital ad fundamentals will improve in 2020. Programmatic ad fundamentals will improve in 2020. Open internet fundamentals will improve in 2020,” Lango wrote in a column published on Jan. 3. “The Trade Desk is at the convergence of all three of those industries.”
Further, Lango estimates that The Trade Desk could earn as much as $12.50 per share by 2025. He placed a 12 month price target of $300 on TTD stock.
It doesn’t look like Lango expects Trade Desk stock to get anywhere close to $1,285 in 40 months.
Why TTD Stock May Reach $1,285
In the 40 months since The Trade Desk went public, TTD stock has a compound annual growth rate of 130%. Up 123% over the past year, its appreciation is slowly decelerating.
If it only climbs 20% in 2020, its momentum will have been almost completely halted. With the economy expected to be stable, if not robust, in the year ahead, it’s hard to imagine the TTD train slowing by that much.
But if TTD stock’s compound annual growth drops by 50 percentage points over the next three years to 65% from 130%, it would reach $1,285. Of course, I’m not taking any of the company’s fundamentals into account.
But if The Trade Desk is at the convergence of three growing industries, as Lango suggests, its performance will probably be pretty good.
As the company continues to gain the confidence of media buyers around the world, The Trade Desk’s free cash flow will continue to grow. As in the case of Amazon (NASDAQ:AMZN) a few years ago, in the next few years, The Trade Desk’s free cash flow may suddenly surge off the charts, seemingly from nowhere.
I realize it’s hard to imagine a scenario like this playing out over the next 40 months. However, funnier things have happened.
Barring a recession, I believe TTD stock is a smart buy at $287, although those who pull the trigger on it might want to have some cash in reserve in case it undergoes a correction at some point in 2020.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.