The Dow Jones Industrial Average (DJINDICES: ^DJI) might be the best-known of the major stock market indexes, but experienced investors know that the S&P 500 (SNPINDEX: ^GSPC) is the index that best reflects the overall market.
As the name implies, the index holds 500 of the top U.S. large-cap stocks. In order to join it, a company must be based in the U.S., be profitable on a generally accepted accounting principles (GAAP) basis over its last four quarters, and have a "large-cap" market cap, generally meaning above $10 billion. S&P Global, which runs the index, also considers liquidity, share float, and the stock's contribution to sector balance in the index.
The S&P 500's managers review the index every quarter and generally swap one or two stocks in and out based on these criteria, so we're likely to see some more changes and new entrants next year. Two stocks in particular looking ripe to join the vaunted index are AppLovin (NASDAQ: APP) and The Trade Desk (NASDAQ: TTD).
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The market's AppLovin it
AppLovin has somewhat quietly been one of the best-performing large-cap stocks of 2024, going parabolic following its third-quarter earnings report. Through Dec. 19, the stock is up 700% year to date as the mobile adtech company has posted skyrocketing growth this year.
Revenue jumped 39% in the third quarter to $1.2 billion, and its margins have dramatically expanded thanks to its investments in AI, including its Axon engine, an AI-driven platform that optimizes ad placement, enhancing ROI for its customers. Net income in the quarter jumped 300% to $434 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 72% to $72 million.
Its software platform, built on Axon and its AppDiscovery marketing software, has become its primary growth driver, contributing more than two-thirds of its revenue in the quarter. AppLovin's other segment is Apps, which consists of more than 200 free-to-play mobile games, though growth in that segment was essentially flat in the third quarter. The emergence of AI and adtech is clearly what's driving the business.
After its surge last year, AppLovin now has a market cap of $107 billion, which would rank it in the top 100 of S&P 500 companies by market cap. Even if the valuation falls, it seems hard to exclude it from the index based on recent trends.
The Trade Desk has earned it
Another adtech stock deserving of a spot in the S&P 500 is The Trade Desk. The Trade Desk has long been considered the leading independent demand-side platform (DSP) in adtech, as its tools help brands and ad agencies effectively manage and optimize their campaigns across an array of platforms, including Connected TV (CTV) and retail media.
The Trade Desk has also established itself as a linchpin of the industry through products like Unified ID 2.0 (UID2), which gives brands a way of tracking users without using cookies, making it more amenable to internet privacy standards.
Like AppLovin, The Trade Desk has also delivered solid growth of late. Revenue rose 27% in its third-quarter earnings report, while GAAP net income jumped 141% to $94 million. The business has long earned high marks for customer satisfaction, as it's reported customer retention of at least 95% every quarter for the last 10 years. Additionally, The Trade Desk continues to roll out new products like its Kokai AI platform and Ventura, a new streaming TV operating system, bringing it into direct competition with Roku.
The Trade Desk has been profitable for several years now, and its market cap of $62.3 billion would put it well within the 200 most valuable companies in the S&P 500.
Why joining the S&P 500 matters
Gaining admission to the S&P 500 is about more than just recognition. When stocks are added to the broad-market index, the exchange-traded funds (ETFs) that track those indexes must buy them. ETFs like the Vanguard S&P 500 ETF now have total assets of more than $1 trillion, meaning an average of more than $2 billion is being invested in each stock in the index, though the fund leans heavily toward the most valuable stocks in the S&P 500, as the current market cap of the index is around $50 trillion.
For that reason, stocks tend to jump when they are added to the S&P 500. S&P Global rebalances the index on a quarterly basis, so the next opportunity for these two stocks to gain admission will be in March.
Based on this evidence, you shouldn't be surprised to see AppLovin and The Trade Desk join the S&P 500 at some point next year.
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Jeremy Bowman has positions in Roku and The Trade Desk. The Motley Fool has positions in and recommends AppLovin, Roku, S&P Global, The Trade Desk, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
