As we head into a new decade with stocks sprinting to all-time highs, everyone is looking for the best stocks to buy in 2020. Wall Street firm Needham thinks they’ve found one in programmatic advertiser leader The Trade Desk (NASDAQ:TTD).
In a recent note, Needham analyst Laura Martin called The Trade Desk the firm’s top stock pick for 2020 thanks to three big tailwinds: improving digital ad market dynamics, continued robust adoption of programmatic advertising and out-sized growth in the “open internet” thanks to big tech titans like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) being distracted by regulatory issues.
The call on The Trade Desk from Needham is notable because Martin’s top stock pick for 2019 was streaming device maker Roku (NASDAQ:ROKU). ROKU stock rose about 350% in 2019. Will The Trade Desk follow suit in 2020?
Yes and no. I couldn’t agree more that The Trade Desk will have a great year in 2020, and that the stock will out-perform its peers. But, it won’t pull a ROKU and quadruple. It won’t even double, or rise by more than 50%. Instead, it’s far more likely that the stock posts something like a 20% return year in 2020.
Still, that’s good enough return to warrant buying and holding shares of The Trade Desk over the next 12 months. As such, I’m with Needham here — the stock is a top pick for 2020.
The Trade Desk Will Have a Great 2020
Most trends support the notion that The Trade Desk will have a great 2020.
First, ad spend trends globally will re-accelerate in 2020 as companies across the globe up their ad budgets against an improving economic backdrop. Second, U.S. ad spends trends will get a double boost from this economic rebound, and from upped political ad spend in an election year. Third, the digital consumption shift will accelerate, thanks to the mainstream roll-out of 5G, the introduction of multiple new streaming services, and the launch of cloud gaming platforms. This will lead to digital ad spend acceleration, because ad dollars always chase consumption. Fourth, automation technology will continue to gain mainstream traction, and as it does, programmatic advertising adoption uptake rates will remain robust.
On top of all that, the “open internet” will continue to gain momentum in 2020. Sustained regulatory pressures on Big Tech will force many of these companies to open up their walled gardens. Part of this opening will be in the digital ad world, where they will be forced to relinquish complete control of the ad transaction process. Amazon has already done this in part, allowing for third-party demand side platforms to buy and sell ads in its ecosystem. Facebook and Alphabet will likely follow suit, leading to healthy growth in ad spend through third-party demand side platforms.
Connecting all the dots, 2020 looks like a great year to be invested in U.S.-focused, third-party demand side platforms in the programmatic digital ad world. In that category, who reigns supreme? You guessed it. The Trade Desk.
As such, The Trade Desk’s underlying fundamentals should materially improve in 2020. As they do, The Trade Desk stock should move higher.
The Trade Desk Stock Will Rise
The long-term profit growth potential of The Trade Desk implies that the stock is positioned to run above $300 in 2020.
At present, this is a 30%-plus revenue growth company in a ~20% growth global digital ad market. The global digital ad market will continue to grow at a double-digit rate over the next several years, thanks to sustained digital consumption shifts in verticals like streaming TV, cloud gaming and mobile. At the same time, programmatic advertising and open internet tailwinds imply that The Trade Desk will gain share in the digital ad market. Therefore, the company should grow revenues at a 20%-plus rate over the next few years.
Gross margins at the company are up near 80%, and stable. That leaves plenty of room for 20%-plus revenue growth to drive positive operating leverage. That’s exactly what will happen. Expense growth rates will moderate as the company gains share and leverages size and reputation (not marketing spend) to win over more clients. Revenue growth rates won’t moderate. That combination will drive healthy margin expansion.
Assuming 20%-plus revenue growth on top of steady margin expansion, my modeling puts The Trade Desk’s earnings-per-share potential at $12.50 by fiscal 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 the stock of nearly $440. Discounted back by 10% per year, that yields a 2020 price target of almost $300.
As we all know, stocks that are firing on all cylinders often tend to trade above their fair value. In 2020, The Trade Desk will be firing on all cylinders. Thus, by the end of the year, I fully expect to see its stock trading at prices well above $300, and probably closer to $325.
Bottom Line on The Trade Desk
Digital ad fundamentals will improve in 2020. Programmatic ad fundamentals will improve in 2020. Open internet fundamentals will improve in 2020.
The Trade Desk is at the convergence of all three of those industries. Consequently, the company is in a great position to report strong numbers over the next twelve months. As they do, the stock should continue to climb, up to and potentially even above the $300 level.
As of this writing, Luke Lango was long TTD and FB.