I'm quite convinced that digital advertising expert The Trade Desk (TTD 3.12%) will beat the market.
I can't tell you exactly when, or by how much -- but this stock is surely heading for brighter days. It's not going to be an overnight success story, and The Trade Desk might keep lagging behind the broader market for a while. If so, I might come back and recommend buying it again, at even lower prices.
So the road ahead looks bumpy and that's perfectly fine. In my eyes, The Trade Desk is a rock-solid idea for long-term investors.
And here's why.
The Trade Desk was recently too hot to handle
The Trade Desk used to be a market darling. The stock closed at $139.51 per share on Dec. 4, 2024. At that point, it had gained a market-crushing 156% in two years. Trading at nosebleed-inducing valuation multiples, The Trade Desk made even high-flying names like Nvidia and Celsius Holdings look cheap in comparison:
|
Stock |
Price to Earnings (TTM) |
Price to Earnings (Forward) |
Price to Free Cash Flow (TTM) |
|---|---|---|---|
|
The Trade Desk |
229 |
85.1 |
134 |
|
Celsius Holdings |
40.4 |
42.6 |
40.4 |
|
Nvidia |
57.2 |
49.1 |
63.8 |
Data collected from YCharts. TTM = trailing 12 months.
But that was a peak, and things changed quickly from the lofty December perch. The Trade Desk's stock has fallen 65.4% as of April 22. Nvidia took a lighter 32.7% price correction while Celsius soared 30.3% higher. Market makers were still ready to embrace some high-priced stocks in this challenging period -- but not The Trade Desk's.
Chiefly, investors panicked about a fairly soft earnings report in February. The company missed its own revenue guidance target, and management suggested that the top-line growth could slow down even more in the next quarterly report.
"As a company, we take great pride in our ability to forecast accurately, and we take full ownership of the shortfall, CFO Laura Schenkein said on the fourth-quarter earnings call. "Importantly, this miss was not due to a lack of opportunity or increased competition. It was on us."
The management team outlined a concrete plan to address the recent shortcomings, but the damage was done. The Trade Desk's stock closed 33% lower the next day and the rout had begun.
Smart fixes, not panic buttons
Many companies would resort to cost-cutting in this situation. But the Q4 shortfall was a revenue issue, not an earnings miss. Expense controls can boost a sagging bottom line, but they aren't likely to help with soft sales growth.
So The Trade Desk went a different way. Its internal teams have been reorganized, and their responsibilities were simplified. The company is putting more time, effort, and marketing budgets into targeting brand-building customers -- a fast-growing client group. Comfortable old business processes have been reviewed and revamped.
The end result should be a leaner, meaner organization with clearer performance goals and tighter operations. Again, this wasn't a cost-cutting panic move with strict budget limits and layoffs. It was a focused restructuring of how the company runs its business -- starting from an impressive baseline.
NASDAQ: TTD
Key Data Points
This great stock is expensive for a reason
The stock is still trading at loftier valuation ratios than its ad-tech industry peers. But it's sticking to these rich ratios for good reason. The Trade Desk is simply a world-class business with fantastic long-term business prospects. The digital advertising space is evolving, as ad buyers are shifting their marketing budgets toward brand-building video spots. And that's The Trade Desk's sweet spot.
Again, the stock isn't exactly cheap even after the recent price correction. At the same time, The Trade Desk deserves a price premium, and I think this is a great time to start or grow a position on this exciting growth stock. It's hard to find another ad-tech specialist with profit margins anywhere near The Trade Desk's sector-leading levels. You can judge the industry by each company's cash reserves, or by their return on invested capital. Any way you slice it, The Trade Desk keeps coming out on top.
There may be more potholes along the way, and the stock could get cheaper as a result. As long as there isn't anything dreadful behind those potential drops, I'll probably recommend buying the stock again at a more comfortable starting price.
