The Trade Desk (TTD 1.67%) has been one of the top adtech stocks to own since its 2016 initial public offering (IPO).
Including its 10-for-1 stock split in 2021, shares have surged 2,000% since it went public as the company has established itself as the leading demand-side platform (DSP), helping brands and ad agencies automate and optimize their ad campaigns.
However, shares got slammed last Friday after the company gave disappointing guidance for the fourth quarter in its third-quarter earnings report. The Trade Desk actually beat third-quarter estimates as revenue rose 25% year over year to $493.3 million, ahead of the consensus at $487.2 million, and adjusted earnings per share rose from $0.26 to $0.33, beating expectations at $0.29.
For the fourth quarter, management sees revenue coming in at at least $580 million, meaning growth of at least 18%, or 22% excluding political ad spending. The analyst consensus, on the other hand, called for $610.8 million, or 24.5%.
The stock plunged 17% as a result of the weak guidance as high-priced growth stocks tend to get dinged when they miss guidance. However, for long-term investors, the sell-off presents an opportunity. The Trade Desk remains the leader in the fast-growing adtech industry, and it should return to its historical pattern of outperformance. Here are two reasons to take advantage of the sell-off and buy the dip in The Trade Desk stock.
Image source: Getty Images.
1. Macroeconomic uncertainty is likely a short-term issue
On the earnings call, management said that it was seeing strong spending in areas like connected TV (CTV) and retail media, but it had seen an increase in "macroeconomic uncertainty" at the start of the quarter, which led to its fourth-quarter forecast.
One analyst asked CEO Jeff Green directly why he was confident that the fourth-quarter headwinds were macro-related and not a competitive impact or something else. Green reminded the audience that The Trade Desk represents top advertisers, and its customers include a majority of the S&P 500. He explained, "Starting about the second week of October, we began to see some transitory cautiousness around certain advertisers."
In particular, he noted a reduction in spend in verticals like automotive and consumer electronics, including cell phones and media and entertainment. He also said that The Trade Desk continues to outgrow the industry by a significant margin, gaining market share.
Those comments about the macro environment echo a number of other companies that are sensitive to the broader economy and have cut their guidance lately. While no company can control the macro-level economy, the good news is that demand in those industries should bounce back over the long run once the economy is stronger.
Assuming that Green is correct, the sell-off looks short-sighted.
2. 2024 looks more promising for The Trade Desk
Currently, analysts are forecasting The Trade Desk's 2024 revenue and profit growth to be similar to 2023, but there are a number of factors that could drive the company to outperform expectations next year.
First, management said it expected headcount growth to continue to be slower than revenue growth, coming in at 15% to 17% this year and growing by a similar pace next year, allowing more money to flow to the bottom line and to invest in products like its artificial intelligence (AI) platform, Kokai. The Trade Desk spends more than a quarter of its revenue on share-based compensation, and like a lot of companies that spend heavily on share-based comp, it repurchases stock to offset that dilution, meaning the share-based compensation has a direct cash cost to the company. Naturally, slowing the pace of hiring should help boost profitability, and moderate the growth of share-based compensation.
Additionally, the launch of the company's Kokai AI platform earlier this year should pave the way to further growth next year as the company expects a number of innovations to roll out in the first half of 2024, including a new user interface. The company also touted the emergence of connected TV and the growth of retail media as growth drivers next year.
2024 is a presidential election year, and Green said of political advertising, "We expect to gain share in this segment and we believe that spend will increase as the year progresses." Finally, the macro-level economy could begin to recover next year, boding well for a ramp-up in advertising spending and beyond.
Overall, The Trade Desk looks well positioned for growth due to AI innovations, sector-level tailwinds, the 2024 election season, expanding profit margins from slower headcount growth, and the prospects for a macro recovery.
Investors should look past the weak guidance, take advantage of the dip, and buy the stock.
