Some days you just can’t win. Shares of The Trade Desk (NASDAQ: TTD) slid around 8% on Wednesday, Nov. 9, even though the company announced third-quarter results that beat expectations on the top and bottom lines.
Encouraging inflation data sent The Trade Desk and the rest of the market soaring again on Thursday. Despite the recent advance, investors worried about a macroeconomic slowdown have pushed this adtech stock down by a terrifying 46% in 2022. A look below the surface, though, suggests the innovative business is gaining a share of a growing market for digital ads.
Is The Trade Desk a smart buy at its beaten-down price, or could there be more trouble ahead? Let’s weigh reasons to add this stock to your portfolio against reasons to avoid it for now.
Reasons to buy The Trade Desk stock
This year, we’ve seen clear signs that advertising dollars are flowing toward The Trade Desk’s independent platform and away from the ad industry giants Alphabet and Meta Platforms.
Alphabet reported Google advertising revenue that contracted by 2% year over year in the third quarter. Meta Platforms reported a 4% revenue decline, caused in part by average ad prices that decreased a frightening 18% year over year.
Unlike Meta and Alphabet, The Trade Desk doesn’t own any of the ad inventory that it sells. This advantage allowed the company to report a 31% year-over-year revenue gain in the third quarter.
We will likely continue to see advertising dollars flow away from the industry giants and toward The Trade Desk in 2023. The company’s user identification system, UID2, is a key advantage that will keep expanding its share of the digital ad market.
The Trade Desk’s UID2 protocol allows advertisers to transact on first-party data without actually giving them any information about users’ identities. Live sports streaming service fuboTV was one of the first big connected television (CTV) providers to employ UID2, and it’s working out extremely well. FuboTV has seen ad revenue rise 113% faster than ad impressions.
More ad-supported streamers eager to boost the value of their ad inventory are adopting UID2 as we speak, and important advertisers are climbing on board too. Procter & Gamble announced its support and adoption of UID2 in September.
Reason to remain cautious
Shares of The Trade Desk have lost a lot of ground this year, but expectations are still kind of high. The stock is trading at 40 times forward-looking earnings estimates. At this nosebleed-inducing valuation, The Trade Desk could fall hard if the market doesn’t see strong earnings growth in the quarters ahead.
The stock could also slide dramatically if the macroeconomic conditions that are already pressuring the ad industry continue to worsen. The Federal Reserve did make a lot of interest rate raises this year that still haven’t had a chance to reverberate throughout the economy.
A buy now?
The digital advertising business is in the middle of a big transformation toward more data and more privacy. The Trade Desk’s user identity protocol satisfies both, and it’s the only one out there that has already been adopted by major players in the CTV space.
With the leading user identity system, The Trade Desk will probably continue growing its share of the giant global advertising market. Total advertising spending in 2021 reached $723 billion, and this figure is expected to climb by around 7% annually over the next three years.
With the only viable user identification system for facilitating CTV ad purchases, the world’s advertisers will most likely continue beating a path to The Trade Desk’s door. External factors could cause the stock to fall in the short term, but investors who buy the stock now and hold it have a very good chance to come out miles ahead over the long run.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Cory Renauer has positions in The Trade Desk. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., The Trade Desk, and fuboTV, Inc. The Motley Fool has a disclosure policy.
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