What happened
Shares of The Trade Desk (TTD 2.53%) plummeted 32.8% in March, according to data provided by S&P Global Market Intelligence. With a drop like that, you'd expect there to be some big news bombshell, but the company didn't announce any negative news during March. It seems this is simply a case of a richly valued growth stock selling off hard due to the bear market ushered in by the COVID-19 pandemic.
While The Trade Desk didn't release any news in March, there is evidence that advertising budgets are being cut due to the coronavirus, which could have a negative effect on The Trade Desk's business.
Image source: Getty Images.
So what
The Trade Desk operates a demand-side digital advertising platform, getting advertisers the best deal for their budgets on the most appropriate channels. As our world becomes increasingly digital, this has created a high-growth business opportunity for The Trade Desk. Both revenue and net income have surged higher over the years.
TTD Revenue data by YCharts.
Given the company's high growth, it often trades at rich valuation multiples. Earlier this year, before the coronavirus bear market, The Trade Desk was trading at a price-to-earnings ratio over 120, and a price-to-sales ratio over 20. The stock market often supports high valuations like this for quality growth businesses. But any whiff of a slowdown can send shares dramatically lower.
Among the companies signaling an advertising spending slowdown is Twitter. The tech company's stock fell in March as it withdrew its first quarter of 2020 guidance, in part due to the coronavirus's negative impact on advertising demand. Companies that run on ad spending, like The Trade Desk, have sold off on these fears.
Now what
It's possible The Trade Desk could see its revenue disrupted by decreased ad spending in coming quarters. While this is a legitimate concern, there are two other big-picture items for investors to keep in mind. First, it's all but certain that advertising will continue moving toward digital in coming years, providing a tailwind to The Trade Desk's business. Second, the company still has a global runway for future growth, as evidenced by two recent deals.
On March 16, The Trade Desk announced the international expansion of its partnership with Samba TV, to begin providing better service to customers in Australia. Two days later, it announced a partnership with popular app TikTok in Asia-Pacific. TikTok is the first short-form video platform to integrate with The Trade Desk, giving the platform a new use case.
In the end, short-term concerns are valid. But long-term growth opportunities abound for this top stock.
