One of my earliest lessons as an investor is one that has stayed with me and served me well over the past 16 years. It's adapted from Sir Isaac Newton's first law of motion, which states in part, "An object in motion tends to stay in motion unless acted upon by an outside force." In the context of investing, that can be distilled down to this simple idea: Winners keep winning.
While that's clearly an oversimplification and not a universal truth, the concept is sound. If a company has cracked the code of success, it will likely continue to gain ground for years. That's why I tend to add to my winners over time and rarely buy on the dip.
One such stock I have added to on multiple occasions is The Trade Desk (TTD 1.67%). I first bought the stock in early 2018 and have subsequently added to my position five more times, making it my seventh-largest holding. It accounts for 5% of my total portfolio. However, last week, in response to tepid guidance, investors punished the stock, sending it down as much as 31% in after-hours trading, and 17% on the day following its Q3 earnings report.
After reviewing the company's results, I happily -- and without hesitation -- bought shares of The Trade Desk a seventh time. Here's why.
Image source: Getty Images.
A history of disruption
To understand the reason for my enthusiasm, it's worth taking a minute to review just what The Trade Desk does. CEO Jeff Green pioneered the world's first online ad exchange, in essence a marketplace for the buying and selling of online ads in real time. It was eventually sold to Microsoft.
Green then went on to build The Trade Desk, which offers a self-service platform that simplifies ad buying. This programmatic advertising system uses cutting-edge artificial intelligence (AI) to help marketers create and manage their ad campaigns and target the right customer at the right time.
Over the years, the company has continued to improve its technology, disrupting the digital advertising industry in the process. Furthermore, The Trade Desk uses transparent pricing, bucking the industry trend and winning rave reviews in the process.
Why did the stock fall?
When The Trade Desk reported its third-quarter results, they were what I've come to expect from the company. Revenue grew 25% year over year to $493 million, while its adjusted earnings per share (EPS) of $0.33 climbed 27%. The figures were comfortably ahead of analysts' consensus estimates, which called for revenue of $479 million and EPS of $0.29. Investors tend to like when a company beats expectations. So far, so good.
However, The Trade Desk's outlook was disappointing. Management forecast revenue of at least $580 million and adjusted EBITDA of about $270 million, representing growth of 18% and 10%, respectively. The guidance caught Wall Street off guard, and some investors tend to sell first and ask questions later.
When an analyst on the conference call asked for an explanation regarding the rapid deceleration, Green provided important context for The Trade Desk's conservative outlook. After pointing out that the company continued to gain market share at the expense of its rivals, he noted the recent auto and Hollywood strikes caused a temporary industrywide lull in ad spending, which has since stabilized. Indeed, the transitory nature of the strikes -- which have now ended -- are merely passing hurdles that will have virtually no impact on The Trade Desk's trajectory over the long term.
An overreaction by investors
Green's explanation certainly makes sense in terms of a temporary lull in ad spending. Furthermore, two of the biggest names in digital advertising, Alphabet and Meta Platforms, reported third-quarter revenue growth of 11% and 23%, respectively -- notably both below The Trade Desk's result. That supports Green's conclusion that the company continues to take market share.
Data by YCharts.
Finally, the sell-off represents a compelling opportunity for investors. To be clear, the stock has never been cheap, but its current price-to-sales ratio of 18 is well below its three-year average of 30.
In my experience, every time The Trade Desk stock has experienced a decline of this magnitude, it has gone on to recover and reach new highs.
With all that as a backdrop, I couldn't resist adding to my position in The Trade Desk for a seventh time.
