The Trade Desk (TTD -1.68%) stock has drawn increasing attention among investors looking to capitalize on growth in the digital advertising industry. Since the beginning of 2023, the stock has steadily climbed, and investors continue to speculate on how long the trend will continue.
The challenge may come from profiting from this investment. The Trade Desk has moved steadily higher since the beginning of 2023. That could leave investors questioning whether the stock will continue climbing in the near term and could even call the five-year growth thesis into question.
Hence, investors should take a closer look at the stock before deciding whether the stock remains in a position to produce market-beating returns over the next five years or if they should stay on the sidelines.
The Trade Desk's role in digital advertising
The Trade Desk offers a demand-side advertising management platform. Thanks to its interface, agencies and companies can manage their digital ad campaigns. With the data it collects, entities can better target where to deploy their ads, allowing them to maximize the returns on such spending.
Additionally, understanding the value proposition means knowing the reason these entities wouldn't turn instead to its largest and most obvious competitor, Alphabet's Google.
Unlike Google, The Trade Desk focuses exclusively on the management and data collection related to ads. Since it does not offer space for digital ads, it is more likely to serve as a neutral platform, something that should reassure customers.
Furthermore, Grand View Research forecasts the digital advertising market size will grow at a compound annual growth rate (CAGR) of 16% through 2030. This likely means a rising tide will lift all boats during that time. Since it forecasts a market size of just under $1.2 trillion by 2030, The Trade Desk will have a massive market from which to draw.
The Trade Desk by the numbers
For now, The Trade Desk only claims a tiny sliver of that potential market. In the first nine months of the year, revenue of $1.7 billion grew 27% yearly. That was faster than the 23% yearly increase in 2023, though it is a slowdown from the 32% rise in 2022.
For all of 2024, analysts predict the company will maintain that 27% growth rate before falling to 20% in 2025. This will keep revenue growth ahead of Grand View's predicted CAGR but indicates a slowing growth trend.
However, the profit picture is promising. The Trade Desk has turned annual profits since 2017. Although profitability pulled back in 2022, it is again on the upswing. In the first three quarters of 2024, net income was $211 million, rising 157% year over year.
That growth has helped boost the stock by more than 400% over the last five years, far surpassing the S&P 500.
Still, past performance does not guarantee future results, and valuations may concern investors, particularly in the near term. Recently, The Trade Desk's trailing P/E ratio was 193. Also, the forward P/E ratio of 72 and the price-to-sales (P/S) ratio of 25 appear to confirm that this has become an expensive stock. However, such behavior increases the likelihood its growth will continue, a factor less likely to affect its performance over five years.
The Trade Desk stock in five years
Ultimately, the Trade Desk has a strong probability of beating the market over the next five years.
Admittedly, a lot can happen in five years, and the industry could look completely different. That makes its current valuation more risky for new buyers.
Nonetheless, the difference between the trailing and forward P/Es implies the stock price is not five years ahead of itself. Also, even if revenue growth slows, net income will likely rise quickly over that time.
With its elevated stock price, new investors should probably consider a dollar-cost averaging strategy to account for the risks of a near-term pullback. However, valuation concerns look like more of a short-term concern. As the digital market industry expands, The Trade Desk and its shareholders are well positioned to reap an outsized benefit.
