The Trade Desk (NASDAQ:TTD) stock has, alongside the rest of the tech sector, plunged in September with shares falling nearly 20% in a matter of days.
While this pullback was entirely warranted – TTD stock was up 93% year-to-date as of early September – it has also now gone too far.
It’s time to buy the dip in TTD stock.
Here’s four big reasons why:
- The Trade Desk’s data-driven digital advertising growth narrative remains robust.
- A rebound in ad spending over the next few quarters will support accelerating growth rates at The Trade Desk.
- TTD stock is now undervalued.
- Zero rates are here to stay, providing a boost to growth stocks like TTD.
Without further ado, then, let’s take a deeper dive into why TTD stock looks good here.
Data-Driven Advertising is the Future
Every process in the world is being automated and increasingly informed by data. Advertising is no exception to this macro trend.
The advertising process use to involve humans negotiating ad prices and advertisers using their gut to decide where to advertise. But the future of advertising is automated data-driven advertising, where “gut” human-based decisions are replaced by machines utilizing data to automate and optimize advertising decisions and the advertising process.
The Trade Desk is pioneering the world’s best demand-side data-driven advertising platform. It’s a platform built for advertisers who want to automate and optimize how and where they spend their ad dollars.
Over the next several years, more and more companies will optimize their ad processes with data-driven advertising. As they do, adoption of The Trade Desk’s demand-side ad tech platform will soar.
And this $20 billion company that is disrupting a global ad industry marching towards $1 trillion in annual spending will become much, much more valuable.
Ad Spending Trends are Rebounding
Helping TTD stock over the next few quarters will be a rebound in ad spending trends.
The story here is pretty simple. The novel coronavirus came. It knocked the global economy off its feet. Consumers stopped spending. Brands stopped advertising. The whole global ad market dried up.
But, over the past few months, the world has increasingly normalized. Shops, restaurants and entertainment venues have opened back up. Consumers have picked up their spending. Brands re-upped their ad budgets.
All of these trends will persist for the foreseeable future. As they do, the plunge in ad spending in early 2020 will lead to a surge in ad spending in late 2020 and into early 2021.
This surge will naturally provide a huge tailwind to The Trade Desk, a company that will likely see its revenue growth rates accelerate meaningfully over the next few quarters. This acceleration will help push TTD stock higher.
The Trade Desk Stock Is Undervalued
The best reason to buy TTD stock here is that this long-term winner is now trading at an attractive discount to its fair value.
My modeling suggests that – behind sustained 15%-plus revenue growth over the next decade and some profit margin expansion with scale – The Trade Desk is set to do about $30 in earnings per share by 2030.
Based a 35x forward earnings multiple, that implies a 2029 price target for TTD stock of $1,050. Discounted back by 8.5% per year, that implies a 2020 price target for TTD stock of just over $500.
That may seem aggressive. But consider, the average sell-side price target on TTD stock is also right around $500.
Thus, at $430, TTD stock looks undervalued.
Zero Rates
In response to the Covid-19 pandemic, the Federal Reserve has slashed interest rates to zero and projects to keep them at zero until at least 2023.
That’s a huge positive for growth stocks like TTD.
With interest rates stuck at zero, fixed income instruments are yielding next to nothing. Government securities are barely beating inflation. So, if you’re going to invest, stocks are the best game in town by a mile.
And in the stock market, growth stocks are the best game in town, since lower rates disproportionately benefit the valuations of companies with tons of value derived from future profits (since the discount rate is lower, the net present value of future profits goes higher, and companies with more value tied to those future profits – i.e. growth companies – see a bigger valuation boost than those with more value tied to today’s profits).
All in all, then, this is the perfect environment for growth stocks like TTD to thrive.
Bottom Line on TTD Stock
TTD stock is a long-term winner that’s on the heels of a healthy pullback.
Don’t overthink this one. Buy the dip and hold for the long haul.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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