Shares of The Trade Desk (TTD -6.80%) were absolutely obliterated after the adtech company reported its second-quarter earnings and announced the departure of its CFO. The stock fell nearly 40% the next trading session, although one famous investor used the pullback to buy shares.
Cathie Wood of Ark Invest, which runs a number of exchange-traded funds (ETFs) focused on technology and innovation, was out scooping up shares. The Trade Desk is a smaller position in her flagship fund, but it is notable that she was out buying the dip.
The question is whether investors should follow suit. Let's take a look at the company's recent earnings report to find out why.
Solid quarter but cautious guidance
The Trade Desk actually reported a solid quarter that topped analysts' estimates, but conservative guidance sent the stock spiraling lower.
For the third quarter, the company forecast that revenue would come in above $717 million, representing 14% growth, while adjusted EBITDA would be approximately $277 million. Those numbers were below analyst expectations, and the revenue growth was a slowdown from what the company reported in Q2.
The Trade Desk highlighted the potential negative impact of tariffs and an uncertain macroeconomic environment in the second half, while also noting that there would be less political advertising this year. Excluding the impact of political advertising, revenue growth for Q3 would be around 18%, pretty similar to the 19% revenue growth the company saw in Q2.
The Trade Desk noted there was uncertainty among advertisers in some verticals, such as autos and consumer packaged goods, due to tariffs. However, it does see this as an opportunity to continue to accelerate the shift to programmatic advertising, which is more transparent and performance-driven. As such, it expects growth to reaccelerate next year.
Many analysts and investors, however, took the company's conservative guidance as a sign that it is losing share to Amazon (AMZN 1.72%) and its demand-side platform. Amazon reported strong advertising revenue in its latest earnings release, up 23% and receiving positive commentary. However, The Trade Desk claims it does not directly compete with the company, as Amazon is still mostly focused on serving ads on its own properties and not across the web. The Trade Desk CEO Jeff Green added that Amazon had recently doubled the supply of ad inventory on its Prime Video streaming service.
Turning to the results themselves, The Trade Desk grew its Q2 revenue by 19% to $694 million, or up 20% excluding political advertising. Adjusted EPS rose 5% to $0.41. That was ahead of the $685 million in revenue and $0.40 in adjusted EPS expected by analysts, as compiled by LSEG.
The Trade Desk is seeing strong adoption of its new Kokai platform, with about 75% of client ad spending now going through Kokai. The artificial intelligence powered platform can process a massive amount of data and give advertisers real-time recommendations for things like budget allocation, targeting, and bidding strategies. It says the customers using Kokai are seeing strong performance improvements in areas such as audience reach and cost per acquisition.
Image source: Getty Images.
Should investors follow Cathie Wood and buy the dip?
When a bearish narrative surrounds a stock and a company issues cautious guidance, it often adds weight to that bearish sentiment, whether or not that is the actual reason for the conservative forecast to begin with. That appears to be what happened with The Trade Desk -- it issued somewhat conservative guidance due to the macro environment but investors fed into the "Amazon is starting to disrupt its business" bear thesis.
However, excluding political advertising, the company's Q3 forecast actually wasn't much different than its Q2 forecast when it guided for revenue growth of 17%. There is no presidential election this year and far fewer elections in general, so it makes sense that there would be an impact, especially in the fall. And while Amazon's ad commentary may have been more bullish, much of its advertising is sponsored product ads on its own site.
Turning to valuation, the pullback sends The Trade Desk shares down to a much more attractive valuation. The stock now trades at a forward price-to-earnings (P/E) ratio of 30 times 2025 analyst estimates and 25 times the 2026 consensus. It also carries a PEG (price/earnings-to-growth) ratio of under 0.5, with PEGs below 1 considered undervalued.
Given the opportunities the company still has in areas like connected TV, where advertising is certainly becoming more prevalent, the stock looks like a buy on this dip.
