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2022 has been a nightmare for The Trade Desk (TTD -0.60%) investors. The company’s hot streak on the stock market came to a screeching halt thanks to the broader stock market sell-off as well as concerns that the advertising platform provider may not be able to sustain its impressive growth. All in all, The Trade Desk saw a big 49% drop in its share price this year.
Investment firm Jefferies recently downgraded The Trade Desk stock from buy to hold and also slashed the price target to $55 from $65. Jefferies analyst James Heaney argued that the stock’s rich valuation and a potential slowdown in the digital advertising market could weigh on the company. Among all analysts, The Trade Desk stock carries a median price target of $60, which represents a 30% upside from current levels. The high price target among the analysts of $90 would translate into a 95% upside.
What investors need to know to push the stock price higher is whether The Trade Desk’s business can sustain its solid growth momentum in 2023 and continue heading higher. Or will macroeconomic headwinds catch up with the company and lead to another year of pain for investors? Let’s explore its 2023 prospects.
It is impressive to see that The Trade Desk is on track to deliver yet another solid year of growth in 2022, despite a slowdown in advertisement spending. Market research firm eMarketer has reduced its 2022 digital advertisement spending growth forecast from 15.6% to 8.6%. However, The Trade Desk is expected to finish the year with almost $1.6 billion in revenue, which would be a third more than its 2021 revenue of $1.2 billion.
So, The Trade Desk is on track to outperform the digital ad market in 2022. That’s not surprising, as the company offers a cloud-based programmatic advertising service on which agencies and customers can purchase, manage, and optimize ads based on their requirements to display across different platforms and channels. The self-service platform that The Trade Desk offers helps its customers improve audience targeting and drive stronger returns on investment.
Live sports streaming provider fuboTV is an example of how The Trade Desk’s technology helps its customers. fuboTV’s ad revenue increased at a terrific pace after it adopted The Trade Desk’s user identification protocol. Not surprisingly, The Trade Desk enjoyed a robust customer retention rate of over 95% for the past eight years.
The good news for The Trade Desk is that digital ad spending is expected to jump from an estimated $567 billion this year to $696 billion by 2024, an increase of 22% over the next couple of years. So, the company’s addressable market is set to get bigger in 2023 and beyond.
What’s more, The Trade Desk points out that it is targeting a much bigger total addressable market, as overall ad spending is expected to hit $816 billion in 2022. It could gain access to a bigger chunk of that market thanks to the growing adoption of programmatic advertising. This is a way to purchase and optimize ad campaigns automatically instead of buying from publishers — a space that’s expected to clock 30% annual growth through 2027.
The Trade Desk CEO Jeff Green remains confident that the company will continue to thrive in 2023 and beyond thanks to “a secular tailwind that I don’t know that we’ve ever seen before, and I don’t know that we’ll ever see again.”
Though shares of The Trade Desk slipped substantially in 2022, they still trade at a rich price-to-sales multiple of 15.4. The S&P 500, for comparison, has a sales multiple of 2.3. Of course, The Trade Desk isn’t as expensive as last year — when it was trading at 41 times sales — but it is still expensive enough to warrant a sell-off in case the company’s growth falls below investors’ expectations.
It is worth noting that the company’s estimated growth in 2022 is going to be lower than its 2021 revenue growth of 43%. Its adjusted earnings of $0.91 per share in 2021 jumped 32% over the prior-year period. The bottom line growth is expected to slow down to just 13% in 2022. Analysts expect a further slowdown in The Trade Desk’s growth next year, forecasting a 20% increase in revenue and an 8% increase in earnings.
That may not go down well with investors who have been used to rapid growth from the company so far. A drop in The Trade Desk’s pace of growth has led to a heavy sell-off this year, and a similar situation could unfold in 2023 considering its expensive valuation.
But investors shouldn’t forget that The Trade Desk is gaining share in a massive market. That could set it up for growth in 2023 and beyond thanks to the growth of the digital ad space. Analysts, for instance, are anticipating 24% annual earnings growth from the company for the next five years.
So, investors should consider accumulating this tech stock if it goes down in 2023 and is available at a cheaper valuation, as it is on track to make the most of a huge end-market opportunity that could send its shares soaring in the long run.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Jefferies Financial Group, The Trade Desk, and fuboTV. The Motley Fool has a disclosure policy.
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