The exchange office (TTD -0.85%) And Alphabet (GOOG -0.02%) (GOOGL 0.10%) represent two different ways of investing in the digital advertising market. The Trade Desk is the world’s largest independent DSP (demand side platform), meaning it helps advertisers buy advertising space across a wide range of platforms. DSPs typically work with sell-side platforms (SSPs), which help publishers sell their own ad inventories.

Alphabet’s Google bundles a DSP, SSP and other ad technology tools into its digital advertising platform. It generates most of its revenue from Google’s search engine, advertising network and YouTube, and shares a near-duopoly in the digital advertising market with Metaplatforms (NASDAQ:META).

Image source: Getty Images.

However, many advertisers who want to place or buy ads on the “open internet” beyond the walled gardens of Google and Meta often turn to independent DSPs like The Trade Desk. That’s why some investors view The Trade Desk as a disruptive challenger to Google, particularly in the fragmented market for ad-supported services. stream videos. Over the past three years, The Trade Desk’s stock is up more than 60% while Alphabet’s stock is up less than 20%. Let’s take a look at why the small ad tech outperformed the market leader – and whether it will remain a better buy for the foreseeable future.

The main differences between The Trade Desk and Alphabet

The Trade Desk generates the majority of its revenue by selling advertising space across desktop, mobile, connected television (CTV), and retail media platforms. Most of its growth is driven by the faster-growing connected TV and retail media markets, reducing 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-powered Solimar platform helps its advertisers use their own first-party data to create targeted ads instead of relying on fuzzy third-party data, its Unified ID 2.0 (UID2) solution eliminates the need for controversial third-party cookies, and its The new OpenPath platform could ultimately 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 comes primarily from Google’s subscription services, its cloud infrastructure platform and its sales of hardware products. Most of its recent growth has been fueled by YouTube ads, the expansion of Google Cloud and the growing number of paid subscriptions on YouTube Premium, YouTube Music and Google One.

Which company is growing the fastest?

Over the past four years, Alphabet has grown much more slowly than The Trade Desk.

Data source: Company earnings reports.

Alphabet faced a steeper slowdown than The Trade Desk during the pandemic as its mobile and desktop advertisers bought fewer ads. Meanwhile, The Trade Desk’s CTV business thrived as people stayed home and watched more ad-supported streaming videos.

The Trade Desk also continued to grow faster than Alphabet in 2022 and 2023, even as macroeconomic headwinds caused many companies to limit their advertising 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 stiffer competition from ByteDance’s TikTok and Meta’s Instagram Reels in the short-video market, while its advertising engine main search was facing tougher AI-powered challengers like MicrosoftIt is (NASDAQ:MSFT) Bing and OpenAI’s SearchGPT.

Which advertising stock is the most advantageous?

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 grow at a CAGR of 12% while its EPS grows at a CAGR of 21%.

Based on these expectations, The Trade Desk stock still looks expensive, at 20 times next year’s sales and 116 times forward earnings. Alphabet looks much cheaper, with revenue 6 times higher than next year and forecast profit 20 times higher.

However, Alphabet’s valuations are being squeezed by the US Department of Justice’s (DOJ) antitrust lawsuit, which could force it to split or sale some of its most valuable assets. An unfavorable outcome in this case could force analysts to moderate their estimates for Alphabet – so it might be too early to say its stock is undervalued. Yet it’s also difficult to justify going all-in on The Trade Desk at current valuations.

Best Buy: Alphabet

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

So if you think Alphabet can overcome these short-term headwinds and continue to grow, it might make more sense to buy its out-of-favor stocks and wait for The Trade Desk valuations to cool down.