Is stock on the trading desk a buy?

If you are thinking of buying Trade office (TTD 0.98%) stock, it’s because you want to make money. After all, the only real reason to invest money now is in the hopes of having more money later.

This logic can be taken a step further: it is relatively easy to make money in the stock market by investing in a S&P 500 index fund. People usually think of this index when they say “stock market”. And the stock market generally grows by about 10% annually. So the only real reason to buy The Trade Desk stock is in the hope of winning better annual returns of over 10% in the long term.

Is this a reasonable expectation for investors looking at The Trade Desk stock today? It may indeed be reasonable, as I will explain.

Why The Trade Desk is a great business

People consume tons of digital content these days. According to The Trade Desk, people listen to three hours of audio every day, which includes music, podcasts and other things. Additionally, people stream hours of digital video content daily. Much of this digital audio and video content is monetized with advertising, providing a lucrative opportunity for a digital advertising technology (adtech) company like The Trade Desk.

Advertising agencies and brands are among those looking to digital channels to reach potential customers. And The Trade Desk boasts that its technology enables respective agencies and brands to increase sales while reducing advertising costs, a big win for businesses.

Trade Desk is consistently growing its revenue by over 20% even though the industry is not growing that fast. And part of the reason for this may be the way it delivers earnings to its clients. The company spearheaded an initiative called Unified ID 2.0, enabling adtech platforms and brands to combine third-party and consumer data in a way that further protects privacy. It’s basically all of this data that The Trade Desk uses to ensure that the right ads are put in front of the right people at the right time.

When the system works, advertisers naturally look to move dollars from other channels to The Trade Desk, which is why it’s growing so quickly. Indeed, The Trade Desk is a growth machine, with revenue growing at a consistently strong rate, as the chart below shows.

TTD (Trimely YoY Growth) revenue data by YCharts. YoY = year over year. TTM = last 12 months.

According to management, The Trade Desk is targeting a $900 billion opportunity. For perspective, brands spent less than $10 billion on the platform in 2023, so if things go well, this business could continue to grow in the years to come.

What about the investment opportunity?

I think it is reasonable to expect The Trade Desk’s business to grow substantially in the near future. But the investment community seems to expect it too, as evidenced by the stock being bid up to a very expensive valuation. As the chart below shows, The Trade Desk stock trades at nearly 24 times sales and more than 100 times free cash flow — both extremely high.

TTD PS Ratio data by YCharts. PS Ratio = price-sales ratio.

Valuing a stock is complicated, and valuations fluctuate increasingly over short periods. But given the already high valuation for The Trade Desk stock, I’d bet the valuation will trend lower in the near term, if anything. Therefore, the stock may take a break in the short term.

However, stocks can beat expensive valuations over the long term, and The Trade Desk is growing at an impressive pace and chasing a big opportunity. So investors can make money, but it may take time.

As of this writing, The Trade Desk has a market capitalization of just over $50 billion. Assuming the stock modestly outperforms average returns for the S&P 500, the stock could push for a $100 billion valuation five years from now. But given how fast it’s growing and the size of its market, this business could realistically be worth $100 billion by then.

In closing, given the high valuation, I personally would not allocate a large percentage of my portfolio valuation to The Trade Desk stock if I were to buy the stock today. But I think it could still be a stock to buy and add to a portfolio as it’s a great business poised for significant growth in the coming years.