The Trade Desk Stock Soars on Inclusion in S&P 500. History Says This Will Happen Next.

Key Points

• The Trade Desk stock advanced more than 7% on news that it would be added to the S&P 500 on July 18.

• During the last decade, stocks have returned an average of 13.6% following their addition to the S&P 500.

• The Trade Desk was recently ranked as a leader in ad tech software due to consistent growth and innovation.

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Shares of The Trade Desk (NASDAQ: TTD) have advanced more than 7% this week due to news of its inclusion in the S&P 500 (SNPINDEX: ^GSPC). The digital advertising company will be officially added to the popular index on July 18. It will replace Ansys, which was acquired by Synopsys.

Importantly, The Trade Desk has been a phenomenal long-term investment. The stock is up 760% in the last seven years, and history says it could climb even higher in the near term after its addition to the S&P 500.

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Here's what investors should know.

Image source: Getty Images.

Historically, stocks tend to increase following their inclusion in the S&P 500

In total, about 175 companies were added to the S&P 500 over the last decade, meaning a little more than a third of the index was replaced during that time. Those stocks returned an average of 13.6% in the 12-month period following their inclusion. Put differently, history says The Trade Desk stock will advance about 14% in the next 12 months.

Readers may be wondering why stocks tend to increase following their inclusion in the S&P 500. The answer lies in the many investment products linked to the index. Any fund tracking the S&P 500 has to buy stock in The Trade Desk to ensure its composition matches that of the benchmark index. That buying activity puts upward pressure on the share price, at least temporarily.

"Inclusion in the U.S. equity benchmark can elevate a company's profile and is becoming more important as passive investment funds grow," according to Bloomberg. But tailwinds arising from a company's addition to the S&P 500 are short lived. So, investors should ask themselves if The Trade Desk is a smart long-term investment before purchasing shares.

The Trade Desk is a recognized leader in ad tech software

The Trade Desk is the largest independent demand-side platform (DSP) in the ad tech industry. Its software leans on artificial intelligence (AI) to help agencies and brands plan, measure, and optimize campaigns across digital channels. Importantly, the company is the dominant DSP in connected TV advertising where it sources inventory from Walt Disney, Netflix, and Roku.

The Trade Desk's independence means it does not own media content or ad inventory, so it has no reason to steer customers toward specific web properties. That eliminates conflicts of interest inherent to competitors like Alphabet and Meta Platforms, which have a clear incentive to sell their own ad inventory.

Portfolio managers at The Ithaka Group recently described the company's competitive moat as stemming from its "industry-leading technology stack, its trusted brand due to its singular focus on the buy-side of the ad ecosystem (no conflicts of interest), and its transparent reporting that details the ROI on each ad dollar spent."

Indeed, Frost & Sullivan analysts recently ranked The Trade Desk as the leading DSP based on growth and innovation. In particular, the report mentioned sophisticated AI tools added during the most recent upgrade, which help media buyers optimize ad campaign performance through AI-powered budgeting, bidding, and targeting.

Wall Street estimates The Trade Desk's adjusted earnings will grow at 12% annually through 2026. That makes the current valuation of 47 times adjusted earnings look expensive. But I think analysts are mistaken. Ad tech spending is projected to grow at 14% annually through 2030, and The Trade Desk has consistently gained market share. If that continues, earnings will likely grow more quickly.

Additionally, Wall Street has consistently underestimated The Trade Desk in the past. The company beat the consensus earnings estimate by an average of 12% during the last six quarters. If that continues, the current valuation would look more reasonable in hindsight. Patient investors should feel comfortable buying a small position today.

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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. Trevor Jennewine has positions in Roku and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Netflix, Roku, Synopsys, The Trade Desk, and Walt Disney. The Motley Fool has a disclosure policy.