It was a rough day for those involved with the program’s advertising specialists. Would you care to join more?
Friday was particularly hard for shareholders of Trade Desk (TTD), which saw its stock price plummet by nearly 39%. This drastic drop followed the release of their quarterly financial report after Thursday’s market close. Initially, the figures seemed solid, leaving many investors shocked by the ensuing sell-off.
This turmoil can be attributed to several factors that combined to create a challenging environment for Trade Desk, raising questions for investors. With shares now roughly 40% cheaper compared to earlier in the week, it leaves one wondering—is this a buying opportunity or a sign of a faltering investment?
Let’s delve into the situation and what it signifies for investors.
Slow Growth
In the second quarter, Trade Desk reported revenues of $694 million, reflecting a year-over-year increase of 19%. This figure surpassed both the company’s expectations and the consensus estimate from analysts of $682 million. Earnings per share (EPS) also climbed to $0.41, which, while a 5% rise, still fell slightly short of the anticipated $0.42.
However, what caught investors off guard was Trade Desk’s cautious outlook. They projected revenues of $717 million, representing a mere 14% growth. This marks a second consecutive quarter of decelerating growth, raising eyebrows among stakeholders.
CFO Laura Shenkain mentioned that the previous year’s quarter benefited significantly from political advertising in the U.S., and although the current figures weren’t disastrous, they did indicate potential challenges ahead, particularly with expected revenues dipping to 18% in the third quarter unless ad spending increases.
The Ghost of Competition
According to a report by Industry Publishing Adweek, some marketers have shifted their ad spending from Trade Desk to Amazon (AMZN), attracted by competitive pricing and Prime Video’s offerings, plus live sports availability. When Trade Desk announced its slowing growth, some viewed it as a confirmation that Amazon was successfully attracting its clientele. Yet, evidence for this shift remains sparse.
During a revenue call, an analyst posed a question to CEO Jeff Green, who pointed out that Amazon is primarily focused on fostering its own advertising platforms. He emphasized that Trade Desk’s independent status is appealing for advertisers, noting, “We don’t have media. We don’t grade our homework.” He described Amazon more as a potential collaborator than a competitor, and while there might be some overlap, it shouldn’t be overstated.
Executive Changes
In light of the recent quarterly results, Trade Desk has appointed Alex Kayyal as the new Chief Financial Officer, following Laura Shenkain’s resignation after over a decade with the company. A press release indicated that Shenkain would remain until the year’s end to ensure a smooth transition.
There’s no indication that anything unsettling triggered this change; in fact, Green expressed appreciation for Shenkain’s contributions, suggesting a friendly parting. Still, investors typically dislike uncertainty, particularly regarding leadership changes, which often leads to stock price declines unless such transitions are anticipated.
A Noble Perch
Historically, Trade Desk has maintained a premium valuation, with a P/E ratio of 66, even after its Friday stock plunge. However, some investors now view this as excessive, especially compared to the S&P 500’s average of about 29.
The company’s consistent performance has inspired a level of confidence, but high valuations often lead to increased volatility. Nervous investors, particularly in bubbly markets, tend to exit once they spot turbulence, contributing to significant price fluctuations.
Playing a Different Game
The recent results led some analysts to downgrade stock ratings and set lower price targets. While this may seem negative, it’s worth noting that Wall Street’s focus is often short-term, looking just a few months ahead, which contrasts with many long-term investors who look beyond a year.
Considering this perspective, it’s crucial not to make hasty decisions based solely on immediate challenges.
The Answer? It Depends on Your Investment Style
Given the various elements that led to the trade desk’s plummet, I argue it’s not a reflection of a fundamentally flawed investment but rather a confluence of factors that led to this drop. Increased competition, executive shifts, and signs of slowing growth have stirred unease among short-term investors.
Having been a long-term investor in Trade Desk, I can say that this isn’t the first time I’ve seen a significant decline. Historical data indicates that shares have dipped over 25% at least ten times since the company went public. Yet, on each of those occasions, the stock managed to rebound, signaling that many of these sell-offs were perhaps overreactions. Since its IPO in late 2016, Trade Desk shares have seen an impressive 1,690% increase, despite the recent stumble.
Given Trade Desk’s track record for overcoming challenges, I believe there’s a strong likelihood of recovery. For long-term investors, this might present an attractive buying opportunity, although short-term volatility still looms, and investors should brace themselves for it.
To be clear, I am maintaining my Trade Desk holdings, and I don’t foresee that changing anytime soon.
