Programmatic advertising platform provider The Trade Desk (TTD 1.67%) has turned out to be a terrific investment in 2023, as shares of the company shot up more than 66% this year. But the stock took a heavy beating after releasing its second-quarter results on Aug. 9.
The Trade Desk delivered solid year-over-year growth and beat Wall Street's expectations. What's more, its guidance for the current quarter was ahead of what analysts forecast. However, the stock has lost 8% of its value following its results. That seems a tad surprising as The Trade Desk is pulling the right strings to make the most of a fast-growing niche, and more importantly it is outperforming the market it operates in.
Let's take a closer look at The Trade Desk's latest numbers and see why its latest pullback could be a buying opportunity for savvy investors.
Why investors sold The Trade Desk after its latest results
The Trade Desk reported a 23% year-over-year jump in revenue last quarter to $464 million. Even better, the company posted a GAAP profit of $0.07 per share, compared to a loss of $0.04 per share in the prior-year period.
On an adjusted basis, The Trade Desk's earnings increased 40% year over year to $0.28 per share, driven by a two-percentage-point jump in its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin to 39%. Analysts were looking for $0.26 per share in adjusted earnings on revenue of $455 million.
The Trade Desk's outlook was the icing on the cake. The company expects revenue of "at least $485 million" in the current quarter, which would be a 23% jump over its revenue in the same period last year. Additionally, the company's adjusted EBITDA forecast of $185 million would represent a double-digit jump over the prior-year period's reading of $163 million. Wall Street would have settled for $183 million in adjusted EBITDA and $481 million in revenue.
However, the Trade Desk stock fell despite beating estimates and delivering better-than-expected guidance. The negative reaction can be attributed to the stock's rich valuation and the slowdown in its growth this year. After all, The Trade Desk is trading at a really expensive 22 times sales right now. That's way higher than its price-to-sales ratio of 15 at the end of 2022.
It is worth noting that The Trade Desk finished 2022 with a 32% jump in revenue to $1.58 billion. Its earnings, however, increased at a slower pace of 14% to $1.04 per share. Analysts are anticipating a 22% increase in The Trade Desk's 2023 revenue to $1.9 billion. Its bottom-line growth is expected to accelerate, and the company is expected to end the year with earnings of $1.24 per share.
Investors were probably expecting stronger growth from The Trade Desk to justify the stock's expensive valuation. But they should look at the bigger picture given that the company is expected to grow at a faster pace from next year.
The slowdown shouldn't last long
The Trade Desk's slower growth in 2023 can be attributed to macroeconomic factors that led advertisers to rein in their spending. According to Magna, the global advertising industry recorded 7% growth last year. The industry is expected to grow only 5% in 2023. The Trade Desk is delivering significantly higher growth despite this slowdown. In fact, its Q2 growth was better than the 21% year-over-year jump it delivered in the first quarter.
More importantly, The Trade Desk management said on the latest earnings conference call that "many indicators and advertiser sentiments are improving," and marketers continue to spend money on data-driven advertising technology (adtech) platforms such as The Trade Desk to boost their returns on investments. This explains why the programmatic ad spending market is expected to grow by $314 billion over the next five years, clocking a compound annual growth rate of almost 27% as per TechNavio.
Moreover, factors such as cooling inflation, the receding risk of a recession, and the presidential election to be held in the U.S. next year are likely to give advertising spending a nice boost. All this indicates why The Trade Desk's growth is expected to pick up in 2024 and remain solid in 2025 as well.
TTD Revenue Estimates for Current Fiscal Year data by YCharts
Additionally, the company's earnings are expected to grow nicely as well.
TTD EPS Estimates for Current Fiscal Year data by YCharts
An acceleration in The Trade Desk's growth going forward should help the stock justify its valuation. That's why investors should consider taking advantage of any pullback in the company's stock price following its latest results. The company could turn out to be a nice growth pick for the long run considering the rapidly growing adoption of programmatic advertising and The Trade Desk's efforts to corner a nice chunk of this market through its smart product development moves.
