Better Growth Stock to Buy Now: Netflix vs. The Trade Desk

Investors have two ways to bet on ad dollars moving online. Netflix (NASDAQ: NFLX) is a global streaming leader that now sells ads alongside subscriptions. And The Trade Desk (NASDAQ: TTD) is an independent software platform that helps brands and agencies buy digital ads across connected TV and the open internet. Even more, both companies are growing at rapid rates, making them good stocks to consider if you're looking to beef up your portfolio with growth stocks.

But which one is the better buy?

Image source: Getty Images.

Netflix: A leader in streaming

Highlighting the company's underlying business momentum, Netflix's third-quarter revenue grew 17% year over year to about $11.5 billion. That pace notably edged up from 16% growth in the second quarter.

Despite reporting such strong results, shares slid sharply following the quarterly update. The pullback highlights one of the potential side effects of highly valued companies: a high bar. Investors show little forgiveness to a growth stock with a high valuation when it misses expectations. Explaining the stock's decline, revenue for Netflix's third quarter was only in line with expectations, and profit came in lower than expected due to a one-time tax expense that spooked investors.

Despite the stock's volatility, things are looking good for the company. For the full year, management guided for $45.1 billion of 2025 revenue, or 16% growth. Additionally, the company's operating margin target for the year still targets a meaningful step up from 2024 -- even with the inclusion of the one-time item tax expense in Q3 that is weighing on full-year profitability.

Despite already having a massive reach, improvement in engagement remains a tailwind. Netflix reported its highest quarterly TV view share in the U.S. and the U.K. Market share gains should help support both future price hikes and growing advertising inventory across its content.

Speaking of ads, the company called out its three-year-old advertising business as one of the quarter's growth drivers, suggesting it is now material to the overall business. In addition, management said the company is on pace to double its advertising business this year.

Though Netflix's growth story is exciting, the stock's valuation is a bit concerning. Even after the stock's sell-off on Wednesday, shares trade at a price-to-earnings multiple in the high forties.

The Trade Desk: a leader in advertising technology

The Trade Desk's revenue is growing even faster than Netflix's. The issue, however, is that this growth rate is moderating recently. Second-quarter revenue rose 19% year over year to $694 million, which was down from about 25% growth in the first quarter. Growth in connected TV and retail media helped offset some softness in other areas.

Looking ahead, the problem may worsen. The Trade Desk's guidance for the third quarter called for at least $717 million in revenue, implying growth of around 14% year over year. Management, however, noted that excluding the benefit of U.S. political ad spending in the third quarter of 2024, the comparable growth rate would be closer to 18%.

Under the surface, the company's product progress has been encouraging. The Trade Desk is benefiting from ongoing adoption of the latest version of its platform, called Kokai. Additionally, the ad tech company recently announced an overhaul to the way it sells data to its customers -- a change it said would go live for some customers late this year and to all users early next year.

Like Netflix, valuation remains demanding. The company trades at about 64 times earnings, leaving very little wiggle room.

Overall, these are both great, fast-growing businesses. Unfortunately, both growth stocks command difficult-to-justify valuations. Still, one is slightly more attractive than the other.

Which is it?

Netflix, given its more conservative valuation and its nascent but promising advertising business, arguably edges out The Trade Desk in a head-to-head comparison. Sure, Netflix stock isn't cheap, and the advertising business ramp could take longer than hoped, but the valuation is simply more attractive than The Trade Desk's.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and The Trade Desk. The Motley Fool has a disclosure policy.