As long-term investors, you can look at short-term stock movements (especially in the downward direction) and decide if the story will matter in three to five years. Sometimes, that answer is a yes and could cause you to reconsider a position. Other times, it's a resounding no, which should trigger you to consider investing more in the company.
I think investors in The Trade Desk (TTD 1.67%) are in this predicament right now, because the stock tumbled 17% on the day after earnings included some disappointing short-term guidance. To me, this looks like a prime opportunity to purchase shares of a rarely cheap stock.
A couple of industries affected guidance
The Trade Desk is the market leader in the buy-side advertising space. Essentially, it works for the advertisers (like a clothing or car company) to find the best place to insert their ads. It does this through a bidding process and uses various bid factors to pay more for an ad if the software believes it's a prime opportunity.
The Trade Desk spans a wide variety of media, with podcasts, mobile, connected TV, and online video all potential spots for the company to place a customer's ad.
But the advertising market can be finicky, as it's one of the first places to see budget cuts if a company decides to rein in spending. One of the top advertising industries on TV is automaking, so car companies are crucial clients for The Trade Desk.
Unfortunately, management said it has seen some weaknesses in these customers because of workers' strikes, on top of declines in electronics: "We saw some reduction in brand spend in verticals such as automotive and consumer electronics, for instance, specifically around cellphones and media and entertainment. Some of these industries have been recently impacted by strikes such as the U.S. auto industry."
This weakness caused The Trade Desk to issue disappointingly low fourth-quarter revenue guidance of $580 million, which would be 18% year-over-year growth. While many companies would be thrilled with that level of growth, it marks some of the lowest The Trade Desk has ever experienced.
TTD revenue (quarterly YoY growth) data by YCharts; YoY = year over year.
This spooked investors, who subsequently sold off the stock. However, this reaction seems rather shortsighted because management tied this short-term weakness to long-term deals they've signed, and it said that if it discounted the election ad spending in the fourth quarter of 2022, the guidance would be for 22% growth -- similar to the third quarter's 25% growth.
In CEO Jeff Green's mind, the company is "firing on all cylinders." But just how much of an opportunity is this pullback?
The price declined, but the stock is far from cheap
While I've been a long-term bull on The Trade Desk, I haven't advocated purchasing the stock at its previous valuations, which topped more than 20 times sales. In fact, I sold some shares in mid-July because it had become such an outsize position in my portfolio and was overvalued (in my opinion).
TTD PS ratio data by YCharts; PS = price to sales.
Now that the stock trades for a more reasonable 18 times sales, I might consider repurchasing some of those shares I sold. However, 18 times sales is still a very expensive valuation, and while the stock is down 30% from its 2023 high, it shouldn't be considered "cheap" from a valuation perspective.
Investors who buy here are still paying a premium for the stock, but I think it's worth it. The Trade Desk has a best-in-class product in the growing digital advertising space. With more consumers switching to streaming, it opens the door for the company to capture a significant portion of a massive market over the next decade.
The soft guidance for one quarter doesn't bother me, since the effects of the electronics and automotive industries are only temporary. As mentioned above, most people will forget about those two events within a couple of years, so it shouldn't be a factor in deciding whether to buy The Trade Desk stock for the long term.
Right now represents a great opportunity to buy stock in The Trade Desk -- it should crush the market over the next three to five years.
