Shares of The Commerce Desk (NASDAQ: TTD) are serving to traders revenue from the robust development in the digital advertising market. The inventory is up 80% 12 months so far, outperforming the S&P 500‘s 25% return on the time of writing.
The dilemma for traders is the inventory’s current run has pushed its price-to-earnings (P/E) valuation to an especially excessive stage. Buyers are at the moment paying over 200 occasions earnings to purchase shares.
This adtech chief is reporting robust development as promoting spending shifts to digital media platforms, so it’s definitely value a premium to the common inventory. Nonetheless, it is tough to see the corporate rising sufficient in 2025 to justify shopping for the inventory at this excessive P/E ratio.
What’s fueling the inventory increased
The digital promoting market is offering The Commerce Desk an enormous tailwind. The corporate generates income from charging charges based mostly on the share of a consumer’s complete promoting spend on its platform. Linked TV (CTV) advert spending (e.g., streaming platforms like Roku) is among the fastest-growing segments of the digital advert market, and The Commerce Desk is effectively positioned to profit.
By the primary three quarters of 2024, income grew 27% 12 months over 12 months, which is an acceleration over the 23% development charge reported right now final 12 months. This exhibits The Commerce Desk is getting the eye of chief advertising officers throughout the company panorama who’re more and more making an attempt to extend their return on funding with promoting in a difficult macroeconomic setting.
“We proceed to win extra share of our purchasers’ promoting budgets as they more and more prioritize platforms just like the Commerce Desk that ship high-value outcomes, particularly in premium video and [connected TV],” CFO Laura Schenkein stated on the corporate’s Q3 earnings name.
Linked TV promoting will stay an ideal alternative for The Commerce Desk. GroupM estimates advert spending on CTV platforms will develop 20% to achieve $38 billion this 12 months. Main leisure firms like Disney and Netflix are investing extra in ad-supported streaming plans to help their development and content material manufacturing, and these firms are utilizing The Commerce Desk to achieve extra entrepreneurs.
The valuation is just too costly
The accelerating income is a superb signal for the way forward for the corporate, however based mostly on Wall Street‘s present development estimates for 2025, it is tough to justify shopping for the inventory proper now.
The consensus analyst estimate has The Commerce Desk’s earnings rising 18% subsequent 12 months to achieve $1.93, with income development additionally anticipated to sluggish to twenty%. The Commerce Desk will face tough development comparisons within the second half of 2025 when it will not get pleasure from a presidential election to spice up advert spending on its platform. Based mostly on subsequent 12 months’s earnings estimate, the inventory trades at a forward P/E of 67, which continues to be a large premium to the S&P 500 common P/E of 23.
In case you already purchased shares of The Commerce Desk when it was buying and selling at a greater worth, I’d not promote it simply because it’s buying and selling at a excessive P/E. However now is just not the best time to begin a place. The inventory’s current run appears to be pricing in a stage of development that is probably not sustainable. Because of this, traders should not purchase the inventory as we speak anticipating the shares to outperform the S&P 500 subsequent 12 months. There’s an excessive amount of draw back danger within the close to time period if the corporate’s development fails to impress Wall Avenue.
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John Ballard has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Netflix, Roku, The Commerce Desk, and Walt Disney. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.
