The Trade Desk's Valuation Looks Expensive. Can the Stock Outperform in 2025?

Shares of The Trade Desk (NASDAQ: TTD) are helping investors profit from the strong growth in the digital advertising market. The stock is up 80% year to date, outperforming the S&P 500's 25% return at the time of writing.

The dilemma for investors is the stock's recent run has pushed its price-to-earnings (P/E) valuation to an extremely high level. Investors are currently paying over 200 times earnings to buy shares.

This adtech leader is reporting strong growth as advertising spending shifts to digital media platforms, so it is certainly worth a premium to the average stock. However, it's difficult to see the company growing enough in 2025 to justify buying the stock at this extreme P/E ratio.

What is fueling the stock higher

The digital advertising market is providing The Trade Desk a huge tailwind. The company generates revenue from charging fees based on the percentage of a client's total advertising spend on its platform. Connected TV (CTV) ad spending (e.g., streaming platforms like Roku) is one of the fastest-growing segments of the digital ad market, and The Trade Desk is well positioned to benefit.

Through the first three quarters of 2024, revenue grew 27% year over year, which is an acceleration over the 23% growth rate reported at this time last year. This shows The Trade Desk is getting the attention of chief marketing officers across the corporate landscape who are increasingly trying to increase their return on investment with advertising in a challenging macroeconomic environment.

"We continue to win more share of our clients' advertising budgets as they increasingly prioritize platforms like the Trade Desk that deliver high-value results, especially in premium video and [connected TV]," CFO Laura Schenkein said on the company's Q3 earnings call.

Connected TV advertising will remain a great opportunity for The Trade Desk. GroupM estimates ad spending on CTV platforms will grow 20% to reach $38 billion this year. Major entertainment companies like Disney and Netflix are investing more in ad-supported streaming plans to support their growth and content production, and these companies are using The Trade Desk to reach more marketers.

The valuation is too expensive

The accelerating revenue is a great sign for the future of the company, but based on Wall Street's current growth estimates for 2025, it's difficult to justify buying the stock right now.

The consensus analyst estimate has The Trade Desk's earnings growing 18% next year to reach $1.93, with revenue growth also expected to slow to 20%. The Trade Desk will face difficult growth comparisons in the second half of 2025 when it won't have the benefit of a presidential election to boost ad spending on its platform. Based on next year's earnings estimate, the stock trades at a forward P/E of 67, which is still a sizable premium to the S&P 500 average P/E of 23.

If you already bought shares of The Trade Desk when it was trading at a better value, I would not sell it just because it is trading at a high P/E. But now is not the ideal time to start a position. The stock's recent run seems to be pricing in a level of growth that may not be sustainable. For this reason, investors shouldn't buy the stock today expecting the shares to outperform the S&P 500 next year. There's too much downside risk in the near term if the company's growth fails to impress Wall Street.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $23,818!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,221!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $451,527!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 11, 2024

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix, Roku, The Trade Desk, and Walt Disney. The Motley Fool has a disclosure policy.