Speculation: Two Stocks Likely to Join the S&P 500 by 2025
The Dow Jones Industrial Average (^DJI decreased by 0.77%) might be commonly recognized as one of the major stock market indexes, but seasoned investors comprehend that the S&P 500 (^GSPC dropped by 1.11%) is the index that best represents the overall market.
As the moniker suggests, the index comprises 500 of the most significant U.S. large-cap stocks. In order to become a part of it, a company must be situated in the U.S., demonstrate profitability using generally accepted accounting principles (GAAP) over its previous four quarters, and possess a "large-cap" market cap, typically valued above $10 billion. S&P Global, the entity responsible for managing the index, also considers liquidity, share float, and the stock's influence on sector balance within the index.
The S&P 500's administrators evaluate the index every quarter and usually incorporate one or two stocks, based on these criteria, meaning we can anticipate further modifications and new additions next year. Two stocks that appear to be suitable candidates to join the esteemed index are AppLovin (APP decreased by 3.33%) and The Trade Desk (TTD declined by 1.68%).
The market adores AppLovin
AppLovin has maintained a relatively low-key yet impressive performance as one of the top-performing large-cap stocks in 2024, experiencing a significant upward trend subsequent to its third-quarter earnings report. Through December 19th, the stock has skyrocketed 700% year to date, with the mobile adtech company exhibiting exceptional growth this year.
Revenue increased by 39% in the third quarter to $1.2 billion, and its profit margins have significantly boosted due to its investments in AI, such as its Axon engine, an AI-driven platform that optimizes ad placement, thereby improving ROI for its clients. Net income in the quarter escalated by 300% to $434 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose by 72% to $72 million.
Its software platform, constructed on Axon and its AppDiscovery marketing software, has become its primary revenue driver, accounting for more than two-thirds of its revenue in the quarter. AppLovin's other segment is Apps, consisting of more than 200 free-to-play mobile games, albeit growth in that segment remained virtually unchanged in the third quarter. The emergence of AI and adtech is evidently propelling the company's success.
Having experienced an escalation last year, AppLovin now boasts a market cap of $107 billion, which would rank it among the top 100 S&P 500 companies by market cap. Despite a potential decrease in valuation, it appears challenging to exclude it from the index due to its recent growth trends.
The Trade Desk has secured its place
Another adtech stock that deserves a slot in the S&P 500 is The Trade Desk. The Trade Desk has long been recognized as the leading independent demand-side platform (DSP) in adtech, with its tools enabling brands and advertising agencies to effectively manage and optimize their campaigns across a variety of platforms, including Connected TV (CTV) and retail media.
The Trade Desk has also fortified its position within the industry through products like Unified ID 2.0 (UID2), which offers brands a means of tracking users without employing cookies, thereby aligning more closely with internet privacy standards.
Like AppLovin, The Trade Desk has also demonstrated noteworthy growth in recent times. Revenue surged by 27% in its third-quarter earnings report, while GAAP net income increased by 141% to $94 million. The business has consistently earned high marks for customer satisfaction, boasting a customer retention rate of at least 95% every quarter for the past 10 years. Furthermore, The Trade Desk persists in introducing new products like its Kokai AI platform and Ventura, a new streaming TV operating system, placing it in direct competition with Roku.
The Trade Desk has been profitable for several years now, and its market cap of $62.3 billion would position it among the 200 most valuable companies in the S&P 500.
The significance of joining the S&P 500
Securing admission to the S&P 500 transcends mere recognition. Stocks are added to the broad-market index, mandating exchange-traded funds (ETFs) that track these indexes to acquire them. ETFs like the Vanguard S&P 500 ETF now hold in excess of $1 trillion in assets, meaning an average of more than $2 billion is being invested in each stock in the index, though the fund primarily focuses on the most valuable stocks within the S&P 500, as the current market cap of the index is approximately $50 trillion.
For this reason, stocks often rise when they are added to the S&P 500. S&P Global rebalances the index quarterly, providing the following opportunity for these two stocks to gain entry into the index.
Based on this data, you should not be surprised to witness AppLovin and The Trade Desk join the S&P 500 at some point next year.
As investors consider their finance strategies, the potential inclusion of AppLovin and The Trade Desk in the S&P 500 could be an intriguing opportunity for money allocation in the investing world. The S&P 500's inclusion of these two adtech giants could significantly increase their market exposure, potentially leading to increased investment flows and further financial growth.
