What happened
Shares of digital ad-buying platform The Trade Desk (TTD -0.58%) rose 13.1% in January, according to data from S&P Global Market Intelligence.
Honestly, there wasn't much company-specific news that drove The Trade Desk's outperformance during the month. In fact, most of the analysts who published notes on the stock gave neutral ratings or lowered their price targets.
And yet, some of the macroeconomic headwinds that caused The Trade Desk to decline 52% in 2022 showed signs of reversing. That led to a resurgence and perhaps short covering of beaten-down growth stocks, and The Trade Desk certainly was certainly part of that group.
So what
As inflation and interest rates spiked last year, The Trade Desk's stock got hit in two ways. First, the inflation spike caused a rapid rise in long-term Treasury bond rates, which many equity investors use as a base for the discount rate they use to value stocks. Rising inflation and interest rates especially harm growth stocks, as the bulk of any growth stock's value is in profits that are far out in the future. The farther out the earnings are, the more they are discounted by higher interest rates.
But in order to combat high inflation, the Federal Reserve rapidly raised the short-term federal funds rate, with the aim of slowing the economy. That caused a second concern for The Trade Desk -- fears over a potential downturn in the economically sensitive advertising market. While The Trade Desk grew 31% in its most recent earnings report in November -- a very impressive rate, considering other advertising stocks saw much weaker growth in the same period -- that didn't stop investors from anticipating harder times in 2023.
That could be why several analysts wrote relatively unenthusiastic notes on The Trade Desk last month. Research company New Street initiated the stock with a rating of neural, while The Vertical Group also lowered its rating to neutral from buy. Even KeyBanc, which maintained its buy rating, lowered its target price to $55 from $56.
So why did the stock rise? Well, it likely came down to investors seeing inflation coming down over the course of several months, long-term expectations for inflation remaining anchored, and anticipation that the Federal Reserve would soon end its rate hikes. In addition, since inflation is coming down but the U.S. is still adding jobs, investors seemed to bet an elusive "soft landing" could be achieved, in which inflation comes down without the Fed having to damage the economy too much.
That would be an ideal scenario for The Trade Desk, as it is still a high-multiple growth stock that's sensitive to interest rates, but also an economically sensitive stock whose revenue and earnings are dependent on cyclical advertising spend.
Now what
After its rise in January, The Trade Desk still trades around 50 times 2023 expected earnings, although those expectations are likely still pretty muted, given that analysts expect a soft advertising market this year. That's not exactly "cheap" by most measures.
On the other hand, The Trade Desk has a lot going for it. First, it's profitable, which is not something many other growth stocks in the software world can say. In addition, The Trade Desk has been outgrowing peers, and is well positioned in the programmatic ad market, which should outgrow the overall ad market due to programmatic advertising's ability to target consumers with high efficiency.
Moreover, The Trade Desk is also leading the charge in a privacy-forward ad targeting paradigm called Unified ID 2.0. As third-party cookies are set to phase out in 2024, it's possible this new more privacy-centric standard could gain wide adoption among advertisers looking to target consumers beyond next year.
So while it's pretty uncertain if The Trade Desk will continue this rally in the near term amid high economic uncertainty, the long-term picture still looks pretty bright.
