Following the trades of large firms can be a smart investing strategy. Not that anyone should blindly follow, but seeing where they think the market could move can provide insights into what you should be doing.
Many people have done this with Warren Buffett's trades at Berkshire Hathaway for years, but they only reveal their trades once every quarter in a 13F document. Cathie Wood and Ark Invest don't follow those same guidelines; they post their daily trades on their website. This allows us to see what they're doing in real time, and they've recently made some big moves in The Trade Desk (TTD 1.67%) stock.
Growth expectations sank the stock
Since Nov. 10, Ark Invest (in its various funds) has purchased 1.42 million shares of The Trade Desk. At today's prices, that's worth about $107 million. So, what happened around Nov. 10 that triggered Ark's buying spree? The Trade Desk's earnings report was released on the evening of the Nov. 9.
Investors didn't like what they heard from The Trade Desk, so they promptly sent the stock down by 17%. But what was so bad in this report?
At face value, everything seemed normal: Revenue was up by 25% year over year to $493 million, and net income rose from $16 million to $39 million. Customer retention also remained over 95%, marking nine years straight of strong retention.
But the problem investors had with the quarter was its guidance for the fourth quarter. Management only guided for $580 million in revenue, indicating 18% growth. Besides one quarter in 2020, this would mark the slowest The Trade Desk has grown in its existence. As for The Trade Desk's preferred profitability measure -- adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- it's only expected to grow 10%. This is a problem because investors see a massive market opportunity in front of The Trade Desk, and it hasn't reached max profitability yet.
However, Wood and her team at Ark Invest believe this is just a single quarter of slowdown, plus management may be sandbagging projections. These are both real possibilities, and with the massive buy-side advertising market coming online as more TV viewers switch to streaming, The Trade Desk should be fine over the long term.
But should you follow their lead and load up on The Trade Desk?
The Trade Desk stock is still expensive
Since the third-quarter results caused a sell-off, The Trade Desk stock has quickly marched back to where it was before the report and is only down about a percent from its pre-earnings figure. So, the screaming deal that Ark got right after the earnings report is no longer available.
With The Trade Desk trading at some expensive valuations, it also may be smart to hold off for a bit.
TTD P/E Ratio (Forward 1 year) data by YCharts.
When a company's revenue growth dips below its price-to-sales (P/S) ratio, it should be an immediate red flag. Ideally, its growth would be two to three times its P/S valuation, but growing slower than its P/S valuation is a cause for concern.
When earnings are considered, The Trade Desk trades at 53 times 2024 earnings, which isn't cheap but isn't terrible considering its huge market opportunity.
So what should investors do?
If you're already a The Trade Desk shareholder, I don't think now is a smart time to add to your position. However, if you don't own shares, The Trade Desk is a phenomenal company in a quickly evolving industry. Establishing a full position now isn't smart, but picking up a small bit so it's in your portfolio to monitor is a wise strategy. That way, if it dips again, you'll be easily alerted when it's time to increase your position sizing.
The Trade Desk may have been a great deal a month ago, but right now, it's very expensive.
