The Trade Desk (NASDAQ:TTD) stock popped to all time highs in early August after the data-driven ad-tech platform reported second-quarter earnings which came in much better than expected. Additionally, the company’s management made upbeat comments about its second-half growth trends.

The results confirmed that, while the Covid-19 pandemic slowed the growth of The Trade Desk’s data-driven advertising, the business continued to grow.

Actually, The Trade Desk’s long-term growth outlook remains as robust as ever. There is presently more certainty than ever before that The Trade Desk will turn into a very popular ad-tech platform for data-driven advertising on the open internet. In other words, The Trade Desk will handle the placement of a high percentage of ads on platforms other than Facebook (NASDAQ:FB) and Alphabet’s  (NASDAQ:GOOG,NASDAQ:GOOGL) Google.

Sure, TTD stock is richly valued. But it will be a long-term winner. Investors should only sell the shares if the company’s fundamentals meaningfully deteriorate or if the stock’s valuation gets nonsensical.

Neither is the case today, so investors should stick with TTD stock.

The Trade Desk’s Strong Earnings

The Trade Desk’s Q2 earnings report was very strong.

The headline numbers didn’t look good. The company’s revenue dropped 13% year-over-year, and its gross margins compressed seven percentage points YOY. Its EBITDA, excluding certain items, dropped 75% YOY.

But those type of declines were expected. After all,  the economic impact of the Covid-19 pandemic was very intense in Q2. During the quarter, ad budgets were slashed, and ad spending fell off a cliff.

Consequently, the headline declines in the firm’s Q2 results didn’t scare investors. Indeed, the company beat analysts’ average top-and–bottom-line estimates, meaning the declines weren’t as bad as feared.

But more importantly, The Trade Desk’s management identified improving trends that have emerged in recent months.

The firm said that after bottoming in mid-April, ad spending on The Trade Desk has increased every month and nearly every week since then. Its revenue growth turned positive by the end of June. It continued to generate positive revenue growth  in July, and its management expects roughly 10% revenue growth in Q3.

Alongside this renewed revenue growth, the increases of the company’s operating spending relative to its revenue growth are expected to moderate.  In Q3, the company’s EBITDA, excluding certain items, is expected to fall “just” 37%.

The implication is that, probably by Q4 and almost assuredly by 2021, The Trade Desk will be back to firing on all cylinders with 20%-plus revenue growth and margin expansion.

Favorable Non-Cyclical Growth Drivers

The company has multiple, non-cyclical growth drivers which support continued strong uptake of The Trade Desk’s demand-side, data-driven advertising platform.

First, there is the continued shift of dollars from physical ads to digital ads. At this point, about 50% of ad dollars are spent in the digital channel. That number closely tracks the total time consumers spend on digital media as a percent of total media, which sat at 54% in 2019. That 54% number will only go up to 60%, 70%, and 80%-plus over time. As it does, digital-ad market share will rise similarly.

The Trade Desk is at the epicenter of the digital-ad market.

Second, there is the increased proliferation and importance of data in our economy. That phenomena will make data-driven  decision-making of all sorts by enterprises — including data-driven advertising — widespread. Gone are the days of humans, paper ,guessing and checking. The days of machines and algorithms are here.

The Trade Desk operates the world’s most robust and effective data-driven advertising platform for ad buyers.

Third, advertisers are pivoting away from low-quality, user-generated-content (UGC) ad inventory, which compromises brand integrity, and towards higher-quality, brand-controlled ad inventory.

The Trade Desk is the largest buyer of the latter ads on the open internet.

Third, there is robust uptake of connected TV (CTV). Consumers are pivoting in bulk to CTV and so are ad dollars. And this pivot isn’t small, as an estimated $230 billion were spent on conventional TV ads last year.

The Trade Desk is a best-in-breed provider of programmatic ad solutions for CTV advertising, as well as a huge buyer of premium CTV ad inventory.

It doesn’t take a rocket scientist to connect the dots. The Trade Desk has “big growth” written all over it.

Tons of Long-Term Growth Potential

Given favorable non-cyclical growth drivers, The Trade Desk has huge revenue and profit growth potential over the next several years.

Global ad spending amounted to $650 billion in 2019. That number is well on its way to $1 trillion and will likely get there before 2030. Digital ad spending, which accounted for 50% of ad revenue in 2019, measured about $325 billion. Assuming digital’s market share will reach 75% by 2030, then digital-ad spending could climb to $750+ billion by then.

Total ad spending on The Trade Desk’s platform came in at just $3.1 billion in 2019 or less than 1% of 2019 digital ad dollars.

Clearly, The Trade Desk has plenty of room to leverage data-driven, positive catalysts to expand its share and sustain huge revenue growth.

At the same time, its EBITDA margins, excluding some items, are around 30%, which is about average for an application software company like The Trade Desk. But The Trade Desk’s market leadership position and large size should enable the company to drive margins above those levels.

Rapid revenue growth and margin expansion leads to huge profit growth.

Normally, strong profit growth leads to large share-price gains.

TTD stock will be no exception.

The Trade Desk’s Valuation Is Full, but Not Extended

The Trade Desk’s revenues should rise at a compounded annual growth rate of about 20% over the next decade, expand its EBITDA margins, excluding some items, to over 40% and drive its EPS to $30-plus.

Application software stocks typically fetch a forward earnings multiple of 35 times.

A 35-times forward multiple on 2030 EPS of $30+ results in a 2029 price target for TTD stock of $1,050.

Discounted back by 8.5% per year, that works out to a 2020 price target for TTD stock of just over $500.

So The Trade Desk  is not overvalued. Its valuation is full, but not extended. And because The Trade Desk is a long-term winner and is clearly poised to generate robust growth over the next several years, investors should sell the stock when its valuation gets tremendously extended.

The Bottom Line on TTD Stock

The Trade Desk’s Q2 results confirmed that it’s a long-term winner.

The valuation of TTD stock is full, but it’s not grossly overextended. As long as that remains true, I think investors should stick with the stock for the long haul and look to buy it on dips.