The Trade Desk (TTD -1.70%) has been among the best-performing stocks over the last five years, delivering a mind-blowing 430% return to shareholders.
Still, investors expecting similar returns going forward should remember that past performance does not guarantee future results. In particular, two significant risks could cause the stock price to move in the other direction in the coming months.
The Trade Desk's growth could slow in the coming quarters
The Trade Desk has been a star among growth stocks. To put it into perspective, the adtech company grew revenue by more than 400% between 2018 and 2022, from $308 million to $1.6 billion. Better still, it has remained profitable throughout most of that period. Finding a company that can deliver rapid growth and profits simultaneously is rare.
However, investors accustomed to the company's hyper-growth mode who expect it to keep delivering such results could be setting themselves up for disappointment.
In The Trade Desk's latest earnings release, the company guided for revenue growth of at least 18% in the current quarter. That marks a clear deceleration from the first three quarters of 2023. In its earnings call, management said they saw "more macroeconomic uncertainty at the start of Q4," which explains the weaker outlook for the period.
A struggling economy would negatively affect the company since customers tend to tighten their budgets during economic slowdowns. This often leads to decreased advertising spending for the whole industry, reducing the demand for the company's services.
As a silver lining, The Trade Desk's focus on programmatic digital advertising, which tends to be more cost-effective and measurable than traditional advertising, might offer some resilience during economic downturns. As companies seek more efficient and targeted advertising solutions, The Trade Desk's platform has its appeal.
Still, while The Trade Desk's business model might benefit from the growing shift toward digital advertising, economic downturns will affect every advertising company, so investors should be prepared for that.
Investors have high expectations for the company
There are plenty of reasons to like The Trade Desk, such as its solid execution and massive growth opportunity (the global ad market is worth $830 billion ).
Understandably, the bulls are willing to pay up to own the stock. As of this writing, the stock trades at price-to-sales (P/S) and price-to-earnings (P/E) ratios of 18 and 205, respectively.
Don't get me wrong. The Trade Desk's premium valuation is not uncommon for a company with this kind of track record and plenty of growth potential. Besides, a high valuation on its own doesn't mean the stock will fall. Great companies do trade at a premium valuation over their peers, and The Trade Desk may very well grow into it over time.
However, the company is already facing uncertainty executing its growth plan as the market conditions become more challenging. Given investors' lofty expectations, the stock faces a higher risk of volatility. For example, the stock plunged 17% following the Q3 earnings report due to the disappointing guidance.
What it means for investors
In short, investors should be mentally prepared for even more of that volatility in the months ahead.
But this is yet another reminder of the advantage long-term investors have being able to look past such price swings while staying focused on the company's strong position in the growing digital advertising market.