What happened

Shares of The Trade Desk (NASDAQ:TTD) tumbled on the company's earnings report this morning, taking down shares of peers like Criteo (NASDAQ:CRTO) and Magnite (NASDAQ:MGNI) along with it. 

As of 12:35 p.m. EDT, The Trade Desk was down 20.4%; Criteo was off 5.4%, and Magnite had fallen 16.3%.

The Trade Desk's results topped estimates and it offered strong guidance for the second quarter. The company even announced a 10-for-1 stock split. However, the performance seemed to fall in the category of good, but not good enough, as high expectations were built into the stock after shares tripled last year on accelerating momentum into ad technology. That trend benefited The Trade Desk, which runs a leading cloud-based, self-serve, demand-side platform (DSP), allowing advertisers to allocate and monitor ad budgets across multiple channels.

A woman looking at a glass screen with a several different digital images.

Image source: Getty Images.

So what

Ostensibly, it was another round of strong results for The Trade Desk: Revenue rose 37% to $219.8 million, which edged out estimates at $216.9 million. Customer retention remained strong, continuing a seven-year streak of retention rates above 95%, a clear sign that the company is delivering value for its customers. As previously announced, Trade Desk is launching a new DSP with Walmart that will revamp its advertising platform, and the company said it's building support for Unified ID 2.0, a new industrywide protocol that balances user privacy with relevant advertising, providing an alternative to third-party cookies.

On the bottom line, The Trade Desk's adjusted EBITDA rose from $39 million to $70.5 million, adjusted earnings per share jumped from $0.90 to $1.41, well ahead of estimates at $0.77.

"We continue to invest in our platform so that we can best meet the evolving needs of the modern marketer," CEO Jeff Green said, "Whether it's the ability to set precise business goals, to activate valuable first-party data, to pioneer new approaches to identity, or to leverage a full scope of onsite and offsite measurement tools, The Trade Desk continues to pioneer the bleeding edge of ad tech for our clients."

Separately, the company announced a stock split that will go into effect on June 17. 

The Trade Desk forecast revenue of $259 million to $262 million, up 87% at the midpoint, lapping a quarter where performance was impacted by the pandemic. That was above the consensus at $253.9 million, and it also guided adjusted EBITDA to at least $84 million.

Criteo and Magnite stock fell in sympathy with the Trade Desk sell-off. Criteo, a wide-reaching ad platform, already reported first-quarter earnings, which explains why the stock is down less than the other two today. Criteo gained 4% on its earnings report last week as the company beat estimates on the top and bottom lines, though its revenue only grew 7% in the period.

Magnite, on the other hand, is due to report first-quarter earnings after the market closes today. Analysts are expecting 64.4% revenue growth to $59.7 million and see the company breaking even on the bottom line. The report will be closely watched as Magnite shares have been highly volatile in recent months, now down more than 50% from their peak in February after the company announced its acquisition of SpotX.

Now what

There was little in The Trade Desk's report that would lead long-term investors to change their thesis, but the modest beat on the top line seems to be one reason for the sell-off, as is the company's lofty valuation. It still trades for a price-to-earnings ratio above 100, despite strong profitability, and a number of growth stocks have retraced their 2020 gains in recent months as market sentiment is shifting to value and cyclical stocks.

Ad tech stocks generally soared last year as advertisers shifted to digital channels during the pandemic, but investors now seem to be concerned about difficult comparisons later in the year and stretched valuations, despite the ample momentum in the sector.

While the Trade Desk sell-off is certainly disappointing to investors, the company still looks well positioned for long-term growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.