Shares of The Trade Desk (TTD 3.18%) fell a total of 10.3% in September, according to data from S&P Global Market Intelligence, as sentiment toward the stock remained fragile after a brutal August decline. As investors continued digesting the company's slowing growth and its disappointing third-quarter guidance reported in August, September brought another headwind: new competition for Netflix's (NFLX -0.71%) ad inventory from a major, deep-pocketed tech giant.
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Everyone wants in on Netflix's ads
The Trade Desk runs a demand-side platform, or DSP, that helps marketers buy digital ads across the open internet. In September, attention swung to Netflix's growing ad business after Amazon (AMZN 0.82%) struck a deal with Netflix to help marketers purchase ad slots from the streaming service alongside other DSPs (including The Trade Desk). The headline itself was not catastrophic, but it reminded investors that Netflix's ad ambitions will attract well-capitalized ad-buying platforms that will compete viciously to get a piece of the growing pie. Indeed, Microsoft, Alphabet, and Yahoo's DSPs were all already working with Netflix, alongside The Trade Desk. Intensifying competition could pressure The Trade Desk's influence and pricing power around a high-profile stream of premium inventory.
This landed just weeks after the company's August report disappointed investors. The company reported 19% revenue growth and guided for just 14% growth. These figures are well below the 25% growth it reported in Q1 but are notably impacted by tough comparisons from the inclusion of political ad spending in the same quarters for 2024.
What to watch
Even after two straight down months, The Trade Desk unfortunately still trades at a valuation that may be too high. Its price-to-earnings ratio of about 58 as of this writing assumes years of durable double-digit top and bottom-line growth, and continued share gains in programmatic advertising despite a red-hot competitive environment.
Of course, a premium like this can be warranted for a category leader with strong client retention and a long runway as ad dollars shift to measurable, automated channels, and The Trade Desk fits this description. That said, competition from giants such as Amazon, Microsoft, and Alphabet is intensifying across retail media, connected TV, and programmatic advertising, throwing a wrench in the bull case by significantly increasing competitive risks.
The Trade Desk's third-quarter earnings report, which is usually released in early November, will be telling. If third-quarter revenue and fourth-quarter guidance imply a stabilized growth rate, sentiment toward the stock could improve. If not -- or if the competitive narrative around marquee partners like Netflix evolves further toward rival platforms -- hesitation is understandable at today's multiple, and shares could underperform from here or even trade lower.
Overall, it makes sense to approach the stock with caution. While The Trade Desk is a great business, an intensely competitive environment means it may make sense to look for a more attractive entry point that does a better job of pricing in risks.
