Better Advertising Stock: The Trade Desk vs. Alphabet

The Trade Desk (NASDAQ: TTD) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) represent two different ways to invest in the digital advertising market. The Trade Desk is the world's largest independent DSP (demand-side platform), which means it helps advertisers purchase ad space across a wide range of platforms. DSPs usually work with sell-side platforms (SSPs), which help publishers sell their own ad inventories.

Alphabet's Google bundles together a DSP, SSP, and other ad tech tools in its digital advertising platform. It generates most of its revenue from Google's search engine, advertising network, and YouTube, and it shares a near duopoly in the digital advertising market with Meta Platforms (NASDAQ: META).

Image source: Getty Images.

However, many advertisers that want to place or purchase ads across the "open internet" beyond Google and Meta's walled gardens often turn to independent DSPs like The Trade Desk. That's why some investors consider The Trade Desk to be a disruptive challenger to Google -- especially in the fragmented market for ad-supported streaming videos. Over the past three years, The Trade Desk's stock rallied more than 60% as Alphabet's stock advanced less than 20%. Let's see why the smaller ad tech outperformed the market leader -- and if it will remain a better buy for the foreseeable future.

The key differences between The Trade Desk and Alphabet

The Trade Desk generates most of its revenue by selling ad space across desktop, mobile, connected TV (CTV), and retail media platforms. Most of its growth is driven by the higher-growth CTV and retail media markets, which reduces its competitive exposure to Google and Meta in the mobile and desktop markets.

The Trade Desk is also evolving into a digital advertising giant as it expands its ecosystem. Its AI-driven Solimar platform helps its advertisers use their own first-party data to craft targeted ads instead of relying on flaky third-party data, its Unified ID 2.0 (UID2) solution eliminates the need for controversial third-party cookies, and its new OpenPath platform could eventually replace SSPs by directly connecting advertisers to publishers.

Alphabet generates most of its revenue from Google's advertising services, but the rest of its revenue mainly comes from Google's subscription-based services, its cloud infrastructure platform, and its sales of hardware products. Most of its recent growth has been fueled by YouTube's ads, the expansion of Google Cloud, and its rising number of paid subscriptions across YouTube Premium, YouTube Music, and Google One.

Which company is growing faster?

Over the past four years, Alphabet grew at a much slower rate than The Trade Desk.

Data source: Company earnings reports.

Alphabet faced a tougher slowdown than The Trade Desk during the pandemic as its mobile and desktop advertisers purchased fewer ads. Meanwhile, The Trade Desk's CTV business flourished as people stayed at home and watched more ad-supported streaming videos.

The Trade Desk also continued to grow faster than Alphabet in 2022 and 2023 -- even as macro headwinds drove many companies to rein in their ad spending. Once again, its exposure to the higher-growth CTV and retail media markets offset its slower growth in the desktop and mobile advertising markets. Alphabet also struggled to maintain YouTube's advertising momentum as it faced tougher competition from ByteDance's TikTok and Meta's Instagram Reels in the short video market, while its core search engine faced tougher AI-powered challengers like Microsoft's (NASDAQ: MSFT) Bing and OpenAI's SearchGPT.

Which advertising stock is a better value?

From 2023 to 2026, analysts expect The Trade Desk's revenue and EPS to grow at a compound annual growth rate (CAGR) of 22% and 62%, respectively. They expect Alphabet's revenue to rise at a CAGR of 12% as its EPS grows at a CAGR of 21%.

Based on those expectations, The Trade Desk's stock still looks expensive at 20 times next year's sales and 116 times forward earnings. Alphabet looks a lot cheaper at 6 times next year's sales and 20 times forward earnings.

However, Alphabet's valuations are being compressed by the U.S. Department of Justice's (DOJ) antitrust lawsuit, which could force it to spin off or sell some of its most valuable assets. An unfavorable outcome in that case could force analysts to rein in their estimates for Alphabet -- so it might be too early to claim its stock is undervalued. Yet it's also hard to justify going all-in on The Trade Desk at its current valuations.

The better buy: Alphabet

The Trade Desk is a great growth stock, but there's simply too much optimism baked into its shares. At these valuations, a single lackluster quarter could easily sink its stock. As for Alphabet, the market seems too pessimistic regarding its future. The DOJ will remain a thorn in its side, but it still has plenty of ways to expand in the high-growth digital advertising, digital media, cloud, and AI markets.

So if you believe Alphabet can weather these near-term headwinds and continue to grow, it might be smarter to buy its out-of-favor stock and wait for The Trade Desk's valuations to cool down.

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 $22,292!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,169!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $407,758!*

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 October 28, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, and The Trade Desk. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.