Is The Trade Desk the Best AI Stock to Buy Now?

AI stocks have powered the market for well over a year, resulting in historically high returns and a renewed interest in growth stocks.

Though companies like Microsoft, NVIDIA and Alphabet receive the most attention from AI-focused investors, there are many smaller companies that also have the potential to leverage the new technology.

One of these less well-known companies is The Trade Desk (NASDAQ:TTD), a marketing technology business that has surged more than 40% in the last year. 

Some have wondered is The Trade Desk an AI stock? Yes, The Trade Desk is a programmatic advertising company that leverages artificial intelligence to increase exposure and ROI for its customers.

The company was founded in 2009 and started to gain traction with the release of its Koa AI assistant. Using AI to identify patterns within customer behavior allows marketers to generate more clicks and, ultimately, sales for their ad spend.

More recently, The Trade Desk released Kokai, a more advanced AI platform that applies recent advances in the technology. Kokai, according to the company, is fed 13 million ad impressions per second, allowing the platform to identify patterns in enormous datasets that can then be used to optimize ad campaigns.

How Is The Trade Desk Performing?

The Trade Desk has seen very strong increases in both revenues and earnings as a result of increased advertiser interest in AI.

In Q1, the company reported revenues of $491 million, a 28% increase from the year-ago quarter. Notably, Q1 of 2023 saw revenues rise 21% over the same period in 2022. This suggests a strong pattern of ongoing revenue growth.

Net income growth has also been extremely positive over the last year. TTD earned $32 million in Q1. This was a massive leap in profitability for the young company, as its net income a year ago was just $9 million.

For the trailing 12 months, the company’s net margin was 9.8%, a number that could increase as The Trade Desk continues to scale up.

The best news for investors is the fact that analysts don’t see these growth rates winding down anytime soon. Over the next year, the company is expected to increase its revenues by nearly another 25%. Earnings per share, meanwhile, are projected to compound at a rate of 21.7% for another 3 to 5 years.

Is the Stock Overvalued?

One of the biggest concerns around AI stocks is the fact that many of them trade at extremely high valuations. The Trade Desk is no exception, as the stock trades at about 61x forward earnings and 179x cash flow.

Analysts, however, see the stock continuing to advance. The average price forecast for TTD is $106.13, about 12 percent higher than the most recent close of $94.78.

Though perhaps not a massive increase, this would allow TTD to deliver returns a bit above the historical market average.

The Downside

The biggest problem for the Trade Desk is that its current valuation leaves little room for management to miss growth expectations.

In the coming year, for instance, analysts project GAAP earnings per share to more than double, a high benchmark that leaves little margin for execution error.

Institutional investors also seem to have some concerns about TTD at the moment. In Q1, institutional outflows trounced inflows at $818 million and $499 million, respectively.

Even though more than 67% of the company is still owned by institutional investors, this spike in outflows may well signal a lack of faith in the company’s ability to justify its high price tag.

A final possible issue is the fact that The Trade Desk, a fairly young company that is still growing rapidly, is already pushing cash into share buybacks. In Q1, the company bought $125 million of its own stock and still had $575 million authorized for further buying.

Share buybacks aren’t negative in and of themselves because they return cash to shareholders and concentrate ownership. The fact that The Trade Desk is already buying back shares this aggressively, though, raises red flags that management is struggling to find more productive uses for the money in the business itself.

Is The Trade Desk a Buy Now?

Trading at a sky high earnings multiple, it’s tough for investors to get their heads wrapped around the idea that The Trade Desk is anything but a high growth play with quite a bit of fluff in its valuation.

Programmatic advertising, though, has a lot of potential to leverage artificial intelligence. By the early 2030s, spending on AI-powered advertising is expected to reach $1.3 trillion. Given its position in the industry and massive data already that can be used to train models, it holds a lot of promise of fulfilling valuation expectations.

While many other AI stocks are priced on expectations of higher productivity that could be years in the future. In advertising, though, AI is already producing measurable results and has been shown to reduce marketing costs by 7.2% and increase conversion rates by up to 30%. In light of these benefits, it’s a near certainty that advertisers will keep putting money into the newest and best AI tools.

The bottom line is The Trade Desk is an expensive stock, but the thesis behind it may be strong enough to justify the price tag. Short-term volatility may well be a problem here, but the long-term prospects look fairly good. If businesses keep spending more on AI-enabled ads, The Trade Desk could prosper for many years to come.

Among analysts, the upside to $99 per share suggests about 10% room to gain whereas a discounted cash flow forecast is more pessimistic and places fair value closer $75 per share, representing 25% downside.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.