It's been a challenging year for investors in The Trade Desk's (NASDAQ: TTD) stock. Just two months into 2025, the stock fell by some 40% as it failed to meet investors' expectations in the recent earnings release. The lower stock price has attracted contrarian investors looking for opportunities to buy shares on the cheap. But is it a good time to buy the stock?
Image source: Getty Images.
Why has The Trade Desk's stock fallen lately?
Investors need to have a rough idea of what triggered the recent decline in stock price, and there are a few.
To start, The Trade Desk's revenue in the fourth quarter came below its guidance. It reported revenue of $741 million, below its guidance of $756 million. While it's not unusual for companies to occasionally deliver below-expected results, it's rare for this programmatic advertising company. In fact, the company has exceeded its guidance in the last eight years, and the recent miss is the first since it went public.
The Trade Desk acknowledged that it had executed below its expectations, blaming the inefficient business structure for impeding its efforts to reach its full potential. As such, it is engaging in the biggest restructuring to ensure that it has the right infrastructure for future growth. While this process intends to be helpful in the long run, it might also have impacted the company's near-term operations.
Another area that needs improvement is the adoption rate of the company's next-generation artificial intelligence (AI) platform, Kokai. The delay in adoption could have strategic implications since customers might find better solutions elsewhere. Fortunately, the company is already working on this to ensure a 100% transition in this calendar year.
The Trade Desk's long-term opportunities
While The Trade Desk's underperformance in the recent quarter is unpleasant, investors might want to take a longer-term approach when investing in the stock. So, the billion-dollar question here is whether The Trade Desk's longer-term prospects have changed due to the recent underwhelming performance.
So far, the answer is no. To start with, the company operates in a humongous market with a total addressable market (TAM) heading toward $1 trillion. Given the size of the opportunity, the adtech company still has plenty of growth runway, considering that it enabled just $12 billion of ad spending in 2024. Besides, the massive TAM can accommodate many successful players even if the competitive dynamics have intensified lately due to the success of AI-driven ad companies like AppLovin.
Moreover, The Trade Desk's longer-term execution track record would suggest that the recent weaker-than-expected execution is a blip rather than a structural issue. To put it into perspective, the tech company has grown its revenue by high double-digit rates every single year since 2015. So, despite all the changes in the adtech industry, the young company has been adapting and growing over the years. This track record suggests that it is likely to overcome its current short-term issue and continue to gain market share.
To this end, the company is making various investments and changes to its business, including hiring for new leadership roles and streamlining the client-facing team to reduce complexity, allocating higher resources to brands, and revamping the product development approach to allow faster product shipping. It is also investing heavily in artificial intelligence in various aspects to improve its operations and client outcomes.
In short, the Trade Desk is still in the game.
A word on valuation
One of the biggest concerns investors have been facing with The Trade Desk's stock is its high valuation. So now that the stock has fallen by 40%, is it finally trading at a reasonable valuation?
Let's look at a simple metric: the price-to-earnings (P/E) ratio. As of this writing, The Trade Desk has a P/E ratio of 90 times. Comparatively, Alphabet's P/E ratio is 21 times. So, while the stock is cheaper today compared to the beginning of the year, it's nevertheless still expensive, considering that it trades at more than 4 times that of Alphabet's P/E ratio.
Investors are not getting a bargain, after all.
What it means for investors
The Trade Desk's recent underperformance is not well aligned with investors who are used to the company's historical outperformance. Still, there's no reason to think that the tech company's long-run prospects have changed. Given its track record, it could emerge stronger from this restructuring.
The downside is that the stock remains extremely pricey, so investors have little margin of safety buying the stock today. So unless investors have an extraordinarily long investment horizon (five years or more) or have a huge risk appetite, it's best to take a pass on The Trade Desk's stock right now.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, AppLovin, and The Trade Desk. The Motley Fool has a disclosure policy.
