Even though the company reported better-than-expected results for the third quarter, shares have recently declined.
It’s just not possible to win every day. The Trade Desk shares fell around 8% despite its top-and-bottom-line results beating expectations.
As a result of encouraging inflation data released on Thursday, The Trade Desk and the rest of the market soared again. This tech stock has fallen 46% in 2022, despite its recent growth. A macroeconomic slowdown is causing investors to be concerned. Despite appearing to be gaining market share in the digital advertising market, a closer look shows otherwise.
At its current price, does The Trade Desk make sense to buy, or could there be more trouble to come? For now, let’s weigh its pros and cons against whether you should add it to your portfolio.
Let’s Take a Seat
The Trade Desk’s independent platform has attracted advertising dollars away from Alphabet and Meta Platforms this year, as evidenced by the company’s revenue growth.
The third quarter of Alphabet’s fiscal year ended with Google advertising revenue declining 2% over the same period last year. The average ad price decreased by an alarming 18% year-over-year, which caused Meta Platforms revenue to decline by 4%.
Contrary to Meta and Alphabet, The Trade Desk does not own any of the ad inventory it sells. Thanks to this advantage, revenue increased by 31% in the third quarter over the same period a year ago.
The Trade Desk is likely to continue to attract advertising dollars away from industry giants in 2023. To maintain its share of the digital ad market, the company will rely on its UID2 user identification system.
UID2 is the Trade Desk’s technology for transacting on first-party data without divulging any personal information about users. FuboTV employs UID2 in its live sports streaming service, and it’s proving to be an extremely successful model for connected television (CTV). The number of ads on FuboTV has increased 113% faster than the number of impressions on the network.
Leading advertisers are climbing on board with UID2 as more ad-supported streamers adopt it, eager to increase their ad inventory’s value. Announcing its support for UID2 in September, Procter & Gamble has committed to the technology.
Despite a lot of ground lost by The Trade Desk this year, expectations are still high. Shares of the company trade at a multiple of 40 times forward-looking earnings estimates. In the absence of strong earnings growth, The Trade Desk may fall hard at its nosebleed valuation.
Stocks could also fall dramatically if macroeconomic conditions, which are already pressing on the advertising industry, continue to deteriorate. Interest rates have been raised a lot by the Federal Reserve this year, but they have not yet taken effect.
What’s Next?
A big change is taking place in the digital advertising industry toward more privacy and more data. A major player in the CTV industry has already adopted Trade Desk’s user identity protocol, which satisfies both requirements.
As a result of its dominant user identity system, The Trade Desk should continue to grow its market share in the giant global advertising market for a long time to come. Within the next three years, advertising spending is expected to increase by about 7% annually to $723 billion.
CTV advertisers will likely continue to beat a path to The Trade Desk’s door since it is the only viable system for facilitating CTV ad purchases. There is a possibility that the stock will fall in the short term due to external factors. In the long run, investors who buy and hold the stock now are likely to come out miles ahead.