If you don’t believe in the power of momentum on Wall Street, I suggest you take a peek at the chart for programmatic advertising leader The Trade Desk (NASDAQ:TTD) stock. Year-to-date, Trade Desk stock is up 226%. That builds on top of a 124% gain in 2019, a 154% gain in 2018 and a 65% gain in 2017.
Net net, from its late-2016 initial public offering (IPO) price of just $18, The Trade Desk stock has risen almost 5,000%.
Talk about momentum. TTD stock got some momentum in late 2016, and hasn’t let any of it go in the four-plus years since.
This momentum isn’t going to die down anytime soon. Instead, TTD stock will sustain robust momentum over the next few months as it bursts through the psychologically important $1,000 level.
The Great Digital Ad Shift
Central to the TTD stock bull thesis is the great digital ad shift, wherein ad dollars are rapidly chasing eyeballs from physical channels (like newspapers, magazines, billboards, linear TV, etc) to digital channels (social media, websites, connected TV, etc).
This shift follows the consumer lifestyle arc where consumers’ daily habits are being increasingly virtualized. We used to read magazines. Now we scroll through Twitter (NYSE:TWTR). We used to drive to malls. Now we shop on Amazon (NASDAQ:AMZN). We used to watch the six o’clock news. Now we binge Netflix (NASDAQ:NFLX).
These shifts are permanent. They are only becoming more pervasive. As they do, more and more engagement will flow into the digital channel. Ad dollars will chase those eyeballs, and continue to migrate into the digital ad channel, too.
Today, digital ads account for 54.1% of total media ad spending. That number will rise to 60% within the next 2-3 years, 70% within the next 5-7 years, and 80% or higher by 2030, creating a rising tide for all digital ad stocks over the next decade, TTD stock included.
The Rapid Adoption of Data-Driven Advertising
Another central component to the TTD stock bull thesis is the rapid adoption of data-driven mechanisms and processes to optimize ad spending and marketing campaigns.
Traditionally, ad spending decisions were made by humans in a largely guess-and-check process that was very error-prone and took forever to both initially transact and subsequently adjust.
But, the emergence of Big Data and AI has fundamentally changed the ad spending process. Now, enterprises can automate, accelerate and ultimately optimize their ad spending decisions using data-driven and AI-powered algorithms.
This new form of data-driven advertising is the future of advertising, since it allows companies to get the most bang for their buck when spending ad dollars. To that end, data-driven advertising has visibility toward ad industry ubiquity.
Who is at the epicenter of this data-driven advertising revolution?
The Trade Desk. The company operates a market-leading, data-driven digital ad platform for ad buyers that is widely considered the best demand-side ad tech platform in the industry.
As such, not only will TTD stock benefit from secular digital ad tailwinds over the next few years, but it will also benefit from much more focused and potent data-driven advertising tailwinds, too.
The Dawn of the “Open Internet”
The last central component to the TTD stock bull thesis is the shift toward “Open Internet” policies.
For years and years, the digital ad market — and by natural overlap, the internet — was controlled by the likes of Facebook, Alphabet and Amazon, who operated in walled gardens that didn’t have much visibility.
But, thanks to sociopolitical pressures on these companies to break open their walled gardens and improve transparency, there has been a major shift toward these digital ad giants employing more “Open Internet” policies.
A big piece of this shift is a sub-level shift toward bigger digital advertisers opening up their platforms to third-party ad tech platform like Trade Desk. For example, Amazon in 2019 broke open its walled garden to allow third-party ad-buying platforms (like Trade Desk) to buy ads on Amazon platforms.
In effect, what this does is dramatically expand The Trade Desk’s addressable market from “all digital ad dollars not spent on the big digital platforms,” to “all digital ad dollars, period.”
That’s a big deal. As “Open Internet” policies gain traction and momentum over the next few years, The Trade Desk’s already red-hot growth narrative could get even hotter.
The Trade Desk’s Hyperscalable Business Model
It is important to note that The Trade Desk isn’t just a hypergrowth company.
This is a hyperscalable company, too.
That is, Trade Desk runs on a very scalable, software-based business model with ~80% gross margins and 30%-plus EBITDA margins. This exceptionally scalable and profitable business model means that big revenue growth over the next 5 to 10 years, will be accompanied by big profit growth.
As go profits, so go stocks.
TTD stock will be no exception to this general trend.
Trade Desk Stock Isn’t Overvalued Yet
The biggest knock against TTD stock today is valuation.
It’s an easy knock to make. After all, this is a $42 billion company that is set to do less than $1 billion in sales this year. That sort of 40-times 2020 sales multiple makes TTD stock look very overvalued.
But that’s the wrong way to look at things. The right way is by seeing The Trade Desk as a $40 billion company disrupting a $1 trillion global advertising market, with a real opportunity to be one of the most important digital ad players in the world at scale.
From that perspective, TTD stock isn’t overvalued. After all, Facebook has amassed an $800 billion market cap on digital ads alone. That stock can add or lose an entire Trade Desk in a single volatile trading day.
Indeed, at a $40 billion market cap, TTD stock has plenty of runway ahead.
Let’s say the company amasses 5% ad market share at scale, for $50 billion in gross ad spend. The Trade Desk normally takes 21% of spend as a commission, equating to about $10.5 billion in revenues. Assuming a 40% operating margin and 20% tax rate, that implies just shy of $3.4 billion in net profits. A 35X multiple on that imputes a long-term valuation target of nearly $120 billion.
So, no, TTD stock is not overvalued today with the market cap hovering around $40 billion.
TTD stock is a long-term winner. There’s no other way to put it.
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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