What happened
Shares of The Trade Desk (TTD 3.35%), a leader in advertising technology, were pulling back last month as the company was one of several high-priced growth stocks to fall on concerns over tightening monetary policy. The Trade Desk's losses came even as the broad market continued to move higher. According to data from S&P Global Market Intelligence, the stock finished December down 11%.
As you can see from the chart below, the stock fell sharply at the beginning of the month and never recovered those losses.
So what
The Trade Desk operates a leading demand-side advertising platform, meaning its technology allows brands and ad agencies to run data-driven ad campaigns using the company's proprietary cloud software.
Image source: Getty Images.
The stock has been a big winner in the market, and in December its high valuation became a liability as investors began to fear that higher interest rates could have a negative impact on high-growth stocks.
On Dec. 1, the stock fell 8% on a broad sell-off in growth stocks as Federal Reserve Chair Jerome Powell recommended that the central bank speed up the taper of its bond-buying program, a precursor to raising interest rates. That's put pressure on high-growth stocks like The Trade Desk, because high-priced stocks benefit from a low discount rate, which is directly tied to interest rates. Low discount rates make earnings far into the future worth more than when interest rates are high, as money loses its value faster in a high-interest rate environment.
On Dec. 2, The Trade Desk got a bit of good news. Needham analyst Laura Martin raised her price target on the stock from $110 to $115, saying that after meeting with management, she was confident in the company's growth path and that Amazon was not a direct competitor.
Over the rest of the month, the stock continued to fluctuate even though there was no news out on it.
Now what
The Trade Desk's pullback in December came after a surge in November. The ad-tech stock tacked on 38% after it crushed estimates in its third-quarter earnings report, showing the growth story is still alive and well.
However, the concerns about The Trade Desk's valuation are valid. Though the company is solidly profitable, it trades at a price-to-earnings ratio of roughly 100, meaning the market has high expectations for its future growth. Given the impact of higher interest rates on the stock, investors should keep their eye on the Fed's actions this year.
