Friday was a tough day for shareholders of The Trade Desk (TTD 0.77%). The company released its quarterly financial report after the market close on Thursday, and the results appeared solid at first glance. That's why the resulting sell-off took many investors by surprise, as the stock plunged 39% before the carnage was over on Friday.
It turns out that there were a number of factors that created a perfect storm, contributing to The Trade Desk's decline and leaving investors with a conundrum. Given that the stock is nearly 40% cheaper than it was earlier this week, is it an opportunity to pick up shares on the cheap, or is this a sign of a broken investing thesis?
Let's take a look at what happened and what it means for investors.
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Decelerating growth
In the second quarter, The Trade Desk generated revenue of $694 million, up 19% year over year. This came in ahead of the company's forecast and beat analysts' consensus estimates of $682 million. This resulted in adjusted earnings per share (EPS) of $0.41, a 5% increase and largely in line with Wall Street's expectations of $0.42.
However, it was The Trade Desk's outlook that seemed to spook investors. The company guided for Q3 revenue of $717 million, an increase of just 14%. That would mark the second consecutive quarter of decelerating growth, which sent up red flags for some investors.
However, CFO Laura Schenkein pointed out that last year's quarter got a boost from political advertising during a presidential election year in the U.S. Excluding that additional ad spending, Q3 revenue would be up 18%, so not as bad as it appears at first glance.
The specter of competition
Industry publication Adweek reported in June that some marketers were moving millions of dollars in connected TV (CTV) ad spend from The Trade Desk to Amazon (AMZN -0.42%). The report suggested that advertisers were being attracted by discounted pricing, the reach of Prime Video, and the company's access to live sports.
When The Trade Desk reported decelerating growth this quarter, some investors took that as proof that Amazon had succeeded in poaching its customers. However, there's simply no evidence to support that.
In fact, during The Trade Desk's earnings call, one analyst put the question to CEO Jeff Green. He responded by reminding investors that Amazon has a vested interest in promoting its own digital ad real estate, whether on its e-commerce website or Amazon Prime Video. Green went on to say, "We don't have any media, and we don't grade our own homework." The Trade Desk's independence is the key attraction for advertisers since it doesn't have the same conflict of interest. "We're playing in a different sandbox," Green said. Finally, the chief executive noted that he sees Amazon as more of a potential partner than a rival.
The overlap between Amazon and The Trade Desk is a small one, and while you can never ignore the digital retailers, the issue is likely being blown out of proportion.
Changing of the guard
In conjunction with its quarterly results, The Trade Desk announced the appointment of Alex Kayyal as the new chief financial officer (CFO). Current CFO Laura Schenkein will be stepping down immediately, having served the company for more than a decade. Schenkein will remain at the company through the end of the year to "support a seamless transition," according to the press release.
There's no indication that anything untoward led to the CFO's departure. Indeed, CEO Jeff Green said, "I have nothing but admiration and respect for her many contributions to the company's success." Given that ringing endorsement, it's clear that Schenkein is parting on amicable terms.
That said, investors dislike uncertainty, which becomes a factor in the departure of any C-suite executive. Many investors take a wait-and-see attitude toward even a suitable replacement. As a result, the replacement of any senior officer at a company generally fuels a decline in the stock price unless it has been telegraphed well in advance.
A lofty perch
For much of the company's history, The Trade Desk has had a premium valuation. Even after the stock's precipitous decline on Friday, its price-to-earnings (P/E) ratio clocked in at 66, which some investors find excessive. For context, the P/E of the S&P 500 is about 29.
The Trade Desk's consistent execution had earned it a level of confidence among investors, who were willing to pay a premium for the stock. However, the byproduct of a high multiple is increased volatility. Investors who are predisposed to be nervous about a frothy valuation are also among the first to bail at the first sign of rough water, fueling bigger price spikes, both up and down.
The phenomenon was in clear view this week and helped fuel The Trade Desk's decline.
Image source: Getty Images.
Playing a different game
In the wake of The Trade Desk's results, there was a veritable stampede by some analysts to downgrade the stock or assign a lower price target. While it can be tempting to see this as a bad sign, it's important to remember that Wall Street is playing a different game.
Most analysts are focused on what will happen over the coming three months, and the outlook for most of Wall Street's finest doesn't extend beyond a year. That puts their opinions at odds with most long-term investors, who are generally looking three to five years into the future.
It's important to keep those differing objectives in mind and not make rash decisions based on short-term headwinds.
The answer? It depends on your investing style
Given the multitude of factors that contributed to The Trade Desk's fall from grace, I would submit that it was something of a perfect storm that conspired to knock the stock from its dizzying heights, not any change in the investing thesis. The possibility of increasing competition, a C-suite shuffle, and decelerating growth gave fair-weather investors (and a few on Wall Street) a case of the jitters.
I'm a longtime investor in The Trade Desk, and I've seen this movie before. Historical charts show that the stock has fallen by 25% or more on at least 10 separate instances since The Trade Desk's public debut. Data also shows that on every previous occasion, the stock has come roaring back, as the company's subsequent results convinced investors that the sell-offs were simply overdone. In fact, since its initial public offering (IPO) in late 2016, the stock has generated gains of 1,690%, even after Friday's sell-off.
Given The Trade Desk's successful track record of overcoming challenges, there's an excellent chance the company will meet its current circumstances head-on and return to its winning ways. For investors with a long-term outlook, this may well represent a buying opportunity, though the stock may still have further to fall over the short term, and investors should be prepared for volatility.
Lest there be any doubt, I plan to keep every single one of my many shares in The Trade Desk, and I don't see that changing anytime soon.
