What happened
Shares of advertising-technology company The Trade Desk (TTD 0.70%) were down 11.7% in May, according to data provided by S&P Global Market Intelligence. The stock was down leading up to the release of the company's quarterly financial results as analysts lowered their expectations. And it was even down about 25% at one point due to surprising commentary from Snap -- another company that generates revenue from ads. But The Trade Desk's management was able to regain some lost investor confidence by subsequently issuing commentary of its own.
So what
Digital advertising is an industry experiencing strong growth, and The Trade Desk has been a stock market darling as it rides this wave. However, current volatility in the market has analysts lowering their expectations everywhere, including with this company. For example, on May 9, both RBC Capital analyst Matthew Swanson and Jefferies analyst Brent Thill lowered their price targets for The Trade Desk stock from $105 per share to $85 per share, according to The Fly.
On May 10, The Trade Desk reported financial results for the first quarter of 2022 and it reminded investors why it's been such a darling. In Q1, the company generated revenue of $315 million, which was up 43% year over year -- a sharp acceleration from its 37% growth rate the previous year.
Image source: Getty Images.
Even though The Trade Desk beat revenue expectations in Q1 and guided above consensus expectations for the second quarter, many analysts lowered their price targets for The Trade Desk nevertheless, congratulating its success but citing valuation concerns. Indeed, investors in general are becoming more sensitive to valuations now that interest rates are rising. And this is the primary reason The Trade Desk stock was down in May.
Now what
Beyond market volatility and valuation concerns, investors are (rightly) jittery about advertising stocks right now. Inflation for essential spending can squeeze discretionary spending. And if people spend less on discretionary items, these businesses will advertise less. And in May, Snap seemingly confirmed these valid concerns.
Keep in mind that Snap had previously said that it could grow its top line by 50% or more annually for "multiple years," so expectations had been sky-high. However, first-quarter revenue was only up 38% year over year and it only guided for 20% to 25% revenue growth in the second quarter. Then, roughly a month after issuing this guidance, Snap management said its Q2 revenue growth wouldn't even be this good, saying, "The macroeconomic environment has deteriorated further and faster than anticipated."
For already jittery investors, this was the confirmation needed to send all advertising stocks, including The Trade Desk, plummeting. However, shortly after the Snap fiasco, The Trade Desk management confirmed its own outlook. In other words, the company is saying that it's not seeing the slowdown that Snap is seeing.
I believe this is a good reminder of why investors should be choosy when buying individual stocks. The business environment can get difficult for companies to operate in, as we're seeing now. But the best-in-class companies often find ways to overcome. And, at least for now, The Trade Desk seems to be outperforming other advertising stocks.
