Advertising technology company The Trade Desk (TTD 1.67%) just released outstanding second-quarter results. Both revenue and earnings came in ahead of management's guidance and analysts' estimates. Additionally, high customer retention levels persisted, and management forecasted more strong growth in Q3. Yet, the stock fell a few percentage points in after-hours trading on Wednesday following The Trade Desk's second-quarter earnings release.
Wednesday's after-hours pullback adds to an already downbeat month for the stock. Is this a good buying opportunity?
Maybe not. Instead, it may make sense to categorize the growth stock as a hold for now, even with another quarter of spectacular business results behind it.
Steller business results
The Trade Desk's second-quarter revenue increased 23% year over year to $464 million. This was an impressive feat, considering the company's tough year-ago comparison when revenue increased 35% year over year. This easily beat analysts' average estimate for second-quarter revenue of $455 million. Further, The Trade Desk's non-GAAP (generally accepted accounting principles) earnings per share rose from $0.20 in the year-ago period to $0.28, beating a consensus estimate of $0.26.
Companies' chief marketing officers' have "come to rely on data-driven advertising during [a] time of uncertainty as a place for certainty and results," said The Trade Desk CEO Jeff Green during the company's second-quarter earnings call as he explained how demand for its platform is increasing.
Highlighting how The Trade Desk is gaining market share in digital advertising, consider that Meta Platform's (META 0.43%) second-quarter revenue grew just 11% year over year. Alphabet's (GOOG 9.96%) (GOOGL 10.22%) advertising revenue increased only 3% year over year during this same period.
Looking to Q3, The Trade Desk management notably guided for another quarter of 23% (or greater) year-over-year revenue growth as companies seem to be shifting more spend to its platform.
A questionable valuation
With such strong business momentum, why is the stock down this month? Valuation may be the culprit. The stock trades at 22 times sales. This compares to Meta and Alphabet's price-to-sales multiples of about 7 and 6, respectively.
Sure, The Trade Desk looks like it will grow faster than Meta and Alphabet for the foreseeable future. Therefore, The Trade Desk arguably deserves a higher valuation multiple than Meta and Alphabet. But The Trade Desk's valuation may be too generous. Its current price leaves very little room for risks.
Some potential significant risks that could arise include a renewed effort from Alphabet to compete more directly with The Trade Desk, an economic slowdown substantially derailing advertising spend, revenue growth rates decelerating meaningfully over the next five years, or some unforeseen technological disruption negatively impacting The Trade Desk's business.
Overall, The Trade Desk does look well positioned to continue gaining market share and further entrench itself as the go-to demand-side platform. But investors may want to wait to see whether they get a chance to buy the stock at a better price -- a price that leaves a meaningful margin of safety for the aggressive growth forecasts needed to justify a high valuation -- before they pull the trigger on the stock.
But for those who already own the stock, the report is a reason to cheer. While the stock may be pricey, it's probably not overvalued to the point that shareholders should take profits -- at least not in light of the spectacular momentum The Trade Desk is displaying in a very tough market.
