Late last year, investors took a deep interest in The Trade Desk (TTD 3.35%) as the stock shot 29% higher the day after it released its fiscal 2021 third-quarter earnings report in early November.
However, since peaking in mid-November, it has lost approximately half of its value as many other tech growth stocks have generally declined. Despite the correction going on in the market, such drops have historically turned into buying opportunities for stockholders in emerging tech companies. The question for investors of The Trade Desk now is whether this constitutes an excellent opportunity to buy or if its sell-off is justified.
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The Trade Desk stock
The Trade Desk stock has delivered significant gains since launching its initial public offering in 2016, rising in value by as much as 3,600%. Yet the current drop in the stock price has taken that total return down to under 2,000%, and the stock price is down about 18% over the last year.
The stock tumbled as investors turned on the tech sector in general as the Federal Reserve signaled a tighter monetary policy, an action that typically reduces the borrowing of money. Moreover, the stock's price-to-earnings ratio had reached a high of almost 200. Amid rising rates, this could have persuaded many investors to reconsider the stock price. Although the earnings multiple has fallen to around 110, whether that discount will attract investors remains unclear.
Why customers turn to The Trade Desk
That valuation is one reason The Trade Desk may not look like a compelling value proposition at first glance. Also, one might wonder how a company with a market cap of $30 billion can gain traction considering that large tech giants such as Alphabet and Meta Platforms drive the majority of revenue from ads.
However, instead of competing directly with tech giants, the company says it acts as "an independent media buying platform." This means it works with companies to tailor and manage online ad campaigns and spending priorities. Since it acts merely as a media buyer of existing ad inventory, it mitigates some of its potential competition.
It also locks customers in with master service agreements. Such deals make it more difficult to switch away from The Trade Desk. And though the phasing out of customer-identifying data cookies from apps might concern its investors, the company is preparing for a cookie-less world. Thanks to the development of Unified ID 2.0, it can now deliver personalized ads without compromising a customer's privacy. This likely offers relief to users concerned about revealing closely held personal information.
The company's financials
Clients have taken well to The Trade Desk's approach. The company reported $801 million in revenue in the first three quarters of 2021. This surged 55% versus the first nine months of 2020. Despite that impressive number, investors should also note the 39% revenue increase in the third quarter. Political spending in Q3 2020 led to higher revenue for that quarter, and The Trade Desk reported 47% revenue growth in Q3 when excluding political spending.
The operating expense during that timeframe came to 36%, helping the company earn a net income of $130 million in the first nine months of 2021. Profit grew by only 43% compared with the same period in 2020. However, The Trade Desk paid $19 million in income taxes during the first three quarters of 2021. In contrast, it received a $53 million tax benefit during the same time in 2020, significantly cutting profit growth.
Also, the company forecasts at least $388 million in revenue for the fourth quarter, which amounts to revenue growth of 21%, 33% when excluding political spending. Again, stockholders should remember that political spending in Q4 2020 led to a revenue bump in the second half of the year, reducing an increase in revenue.
Analysts also forecast a 31% revenue increase in 2022, signaling a slowdown. Nonetheless, other analysts see this estimate as overly conservative. A product refresh and the likelihood of higher political spending in the U.S. during the midterm elections could further boost revenue.
Should I consider buying The Trade Desk?
Given a less favorable interest rate environment, slowing revenue growth, and an elevated valuation, prospective buyers may want to consider staying on the sidelines for now.
Admittedly, with the vital role The Trade Desk plays in the burgeoning digital ad market, the tech sell-off will likely turn it into a buying opportunity. Still, with investors turning from growth tech stocks amid rising interest rates, investors should look for a sustained increase in the stock price before adding positions.
