There’s still a huge, long-term opportunity ahead for this company.
The S&P 500 is one of the most important indexes in global financial markets. It tracks 500 of the biggest U.S.-based companies, but there are more requirements than just a large market capitalization. S&P 500 eligibility also requires a company to produce a profit in the most recent quarter and the trailing-12-month period. A stock also must have sufficient liquidity.
The committee at S&P Global updates the index every quarter, but there are some special events that can force it to update it on irregular intervals — for example, when a company in the index gets acquired or goes private. With one fewer publicly traded stock, the committee needs to add a new one to make up for it.
That happened recently after Synopsys closed its acquisition of Ansys on July 17. Replacing Ansys is The Trade Desk (TTD 1.26%). And even after climbing 80% from its lows in April, as of this writing, Wall Street still thinks there’s room for the stock to run.
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A wild ride into the S&P 500
The Trade Desk’s path to inclusion in the S&P 500 didn’t come without a few missteps since its 2016 IPO. One of its biggest came recently when the company missed its own revenue outlook for the fourth quarter. That was its first miss since going public.
The revenue miss was caused by operational challenges in transitioning its customers to its new artificial intelligence (AI) platform for buying digital advertising, dubbed Kokai. The new platform helps marketers optimize their bids on digital ad placements along with improving targeting to help businesses get the most out of their marketing budgets. Kokai also comes with improved measurement capabilities in the era of App Tracking Transparency, which prevents apps from tracking user behavior outside their own website.
The push to transition customers moved slowly, and management decided to make some major personnel changes to try to accelerate the shift in the fourth quarter. That led to the shortfall in revenue in the fourth quarter, which sent the stock sinking from its late-2024 highs. At one point, the stock was down 67%.
But management’s move proved worthwhile in the first quarter. It’s now ahead of schedule on its plan to transition its entire customer base to Kokai before year-end, with about two-thirds of clients on the platform. More importantly, its focus on transitioning its biggest customers means the bulk of spend is running through Kokai.
The market rewarded The Trade Desk’s stock on those strong results. The stock got another shot in the arm on the news that it would be included in the S&P 500, but the share price still remains about 40% below its all-time high. Many analysts still think there’s room for The Trade Desk to recover from here, and the long-term trend favors the ad platform.
Where does Wall Street see the stock going?
As The Trade Desk has seen its stock price recover, Wall Street analysts remain as bullish as ever. Three months ago, 30 of the 39 analysts covering the stock rated it as a buy or its equivalent. Today, it has the same number of buy ratings.
Since the start of July, the stock has received several price target increases. The highest comes from UBS analysts, which put a $105 price target on the stock on July 16 after it was announced the company would join the S&P 500. That implies upside of 29% from the price as of this writing.
The long-term outlook for The Trade Desk is even better. The demand-side platform separates itself from other digital ad platforms because it’s not owned by one of the giant walled gardens that dominate the industry: Alphabet‘s Google, Meta Platforms, or Amazon.
Instead of focusing on its own properties, The Trade Desk looks to offer ad placements around the web, in streaming video services, podcasts, and other digital media, regardless of who owns the content. As more businesses develop their own ad-supported streaming services and new podcasts enter the market every day, that’s enabled it to grow its share of digital advertising over time.
Still, The Trade Desk accounts for a tiny percentage of the total digital advertising market. Customers spent about $12 billion on its platform last year. Management estimates the entire ad industry takes in $1 trillion of ad spending. Huge swaths of the market for The Trade Desk to tap into over the long run remain.
Management is looking to capture more of that market by bringing in new inventory at lower prices for marketers. Its OpenPath service allows publishers to work directly with The Trade Desk to fill inventory, cutting out the middlemen and leaving more of the economics for publishers and marketers. That gives it a chance to compete on price against Google, Meta, and Amazon, which sell access to their own inventory. The Trade Desk has even started to look at building its own inventory with its Ventura streaming TV operating system.
A successful transition to Kokai and continued improvements in its capabilities to improve ad efficacy for marketers should support the growth of ad spending through The Trade Desk. The stock currently trades for an enterprise value-to-forward EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 34. But with strong revenue growth and margin expansion, that price looks like a fair value for the stock right now. Most of the analysts following the stock still think it’s heading higher from here.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. 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. Adam Levy has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, S&P Global, Synopsys, and The Trade Desk. The Motley Fool recommends Ansys. The Motley Fool has a disclosure policy.