Cathie Wood's Ark Invest is exceedingly bullish on artificial intelligence (AI). The firm believes AI software revenue could grow at 42% annually to reach $14 trillion by the end of the decade. So readers may be surprised to learn that Ark has been selling shares of Nvidia (NASDAQ: NVDA), a chipmaker whose processors are widely seen as synonymous with AI.
To be clear, Ark still has about 1% of its portfolio invested in Nvidia, and the chipmaker ranks as its 26th-largest holding, so Wood and her team are by no means bearish. But Nvidia has seen its share price double in the last six months, and Ark has responded by trimming its position and redeploying the funds elsewhere.
Some of that capital was used to start a position in another AI stock: The Trade Desk (TTD -0.43%). The firm started buying shares in May, and most recently bought shares in early September.
Here's why investors should give this AI growth a close look.
The Trade Desk has gained substantial market share in recent years
The Trade Desk operates a demand-side platform (DSP), a suite of ad tech software that helps ad buyers plan, measure, and optimize data-driven campaigns across various digital channels, including desktop, mobile, and connected TV. Despite competing with ad giants like Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META), The Trade Desk is gaining market share.
In fact, CEO Jeff Green recently said: "Our relative outperformance over the last few quarters means we have gained more market share than in any other period in our company's history." That commentary came on the heels of a strong second-quarter financial report. The Trade Desk increased its revenue 23% in the June quarter, while industry leaders Alphabet and Meta reported ad revenue growth of just 3% and 12%, respectively.
Going forward, Grand View Research says the ad tech market could grow at 14% annually to reach $2.4 trillion by 2030, but investors have two good reasons to believe The Trade Desk will outpace the average and continue taking share: It is an independent ad tech company, and its software incorporates sophisticated artificial intelligence (AI).
The Trade Desk is an independent ad tech company
The Trade Desk is an independent and buy-side-focused ad tech company, meaning it owns neither web properties nor ad inventory, and it works only with ad buyers. That transparency engenders trust in an industry rife with conflicts of interest.
Consider Alphabet and Meta Platforms: Both providesoftware to ad buyers and ad sellers, meaning they participate on both sides of ad transactions. Would you trust a real estate agent to represent you as a homebuyer if that agent also represented the seller? Probably not. But there is another problem.
Alphabet and Meta also sell their own ad inventory from properties like Google Search, YouTube, Facebook, and Instagram, alongside inventory from third-party sellers. In other words, they compete against their own customers. So brands are understandably hesitant about bringing data to Alphabet and Meta, because doing so is analogous to arming a foe. Alphabet and Meta could use any data brought to the platform to sell their own ad inventory, and they have a clear incentive to do so.
The Trade Desk avoids those conflicts of interest by focusing on ad buyers and eschewing media ownership. That strategy has undoubtedly contributed to market share gains. For instance, The Trade Desk has kept its retention rate above 95% for nine-plus years, something management attributes to its objectivity. The company has also built what it calls the "most advanced data marketplace" in the world. Brands are more willing to share data with noncompetitors, so The Trade Desk can help advertisers measure and optimize campaigns in a way that would not be possible with Alphabet or Meta.
The Trade Desk offers sophisticated artificial intelligence
The Trade Desk's technological prowess extends beyond advanced measurement capabilities. Its ad tech platform leans on what management calls "industry-leading AI" to help advertisers optimize campaign performance with predictive insights and recommendations.
Readers may wonder why The Trade Desk is so confident in its AI, especially when it competes with Alphabet, a company regarded as one of the world's foremost AI authorities. The answer circles back to data. Quality data is the cornerstone of AI and, as discussed, brands are more willing to share data with The Trade Desk.
But there is more to the story. The Trade Desk is also the largest independent DSP in the world. It looks at more than 10 million ad requests every second, and those requests collectively create what CEO Jeff Green calls a "very robust and unique dataset." That gives management confidence in its AI engine.
Some independent analysts have expressed similar sentiment. The consultancy Quadrant Knowledge Solutions recently recognized The Trade Desk as the best ad tech platform on the market, citing a more profound customer impact and a greater degree of technological excellence than any other vendor.
Why The Trade Desk stock is worth buying
The Trade Desk offers a unique combination of independence, scale, and sophisticated AI that should continue to drive market share gains in the coming years. The stock certainly isn't cheap at 24.8 times sales, but that valuation is a discount to the three-year average of 29.9 times sales, and it's a reasonable price to pay given the potential upside.
Risk-tolerant investors should consider buying a small position in this AI growth stock today -- the key word being "small." Start with no more than 1% of your portfolio and selectively add shares as better opportunities arise.
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 Nvidia and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Nvidia, and The Trade Desk. The Motley Fool has a disclosure policy.
