When a proven, top-performing company sees its stock fall by a large amount, it could be an opportunity. After all, Warren Buffett once said, "The best thing that happens to us is when a great company gets into temporary trouble. [...] We want to buy them when they're on the operating table."
In that light, The Trade Desk(NASDAQ: TTD) may offer such as opportunity today. The company missed expectations for the first time in its eight years as a public company on its Q4 2024 earnings report. Having grown accustomed to nothing but beats, Wall Street swiftly punished the stock, sending it down now 50% below the all-time highs set in December.
But is the plunge a Buffett-like opportunity to buy a great stock on the cheap? Or is the decline a sign of further difficulties to come?
The Trade Desk's "disappointing" quarter
At first glance, The Trade Desk's quarter didn't look so bad. After all, revenue still grew 22% to $741 million, which is a pretty solid growth rate and just a touch below the 23% growth seen in the year-ago quarter. It usually gets harder for companies to grow as fast as they get bigger, because of the law of large numbers. Moreover, the bottom line of $0.36 per share and non-GAAP EPS figure of $0.56 actually beat analyst estimates.
However, Wall Street is all about the expectations game, and the revenue figure fell short of analyst expectations of $756 million. It was also the first time in 33 quarters that The Trade Desk missed its own internal forecast.
Needless to say, the punishment was rather harsh, owing in part to The Trade Desk's high valuation at around 150 times earnings just before earnings.
CEO Jeff Green reassures
On the post-release conference call with analysts, CEO Jeff Green reassured investors that the miss wasn't a serious long-term issue:
This didn't happen because the opportunity isn't as big as we thought. In this case, it isn't because of competition, either. For Q4, the reality is that we stumbled due to a series of small execution missteps while simultaneously preparing for the future. If this were a sporting event, we'd still have a championship-caliber team, but in this particular game, we turned over the ball too many times. That said, we see a larger and faster growing market than we originally expected, which is why we have been making changes and will continue to do so.
Green noted that the company usually undergoes a reorganization every December. This is actually a healthy exercise, as it prevents The Trade Desk from becoming bureaucratic and overly complex in an ever-changing industry. However, Green noted that this time, there was a larger reorganization than normal, which led to a few slip-ups.
Image source: Getty Images.
These reorganization occurred across many aspects of the business, between engineering, sales, and "people"-oriented changes.
In engineering, Green noted the company divided engineering into 100 smaller "scrum" teams to deliver weekly updates, rather than big updates periodically. In sales, the company divided people into working either exclusively with brands or agencies, as opposed to overlapping on both. That also required new reporting requirements.
Green also pointed to a few "people mistakes" on which he wouldn't elaborate but said were already fixed. And he also said there were a few choices the company had to make in which the "long term was at odds with the short term." In these cases, Green says The Trade Desk always prioritizes the long term whenever there's a tradeoff.
This probably involved the move from The Trade Desk's older Solimar platform to Kokai, which is its newer AI-powered platform. While a majority of TTD clients have transitioned to Kokai, that transition is still in progress. From Green's comments, it appears the company paused the transition to add certain AI-powered features into Kokai before transitioning more customers.
Finally, there did seem to be an industrywide slowdown, with Green saying that advertisers are becoming more "strategic and data-driven" in buying decisions. Green notes that this may have led to a slowdown in the near term but ultimately plays into The Trade Desk's strengths in data-driven programmatic advertising.
How should investors take the news?
If in fact the Q4 revenue shortfall was merely due to reorganizing the company to capitalize on long-term future growth, this could be a golden opportunity for investors.
For instance, if one takes Netflix(NASDAQ: NFLX) as an example, its stock fell more than 50% two separate times in its corporate life: in 2011, when it transitioned from DVD rentals to independent production of its own shows streamed over the internet, and in 2022, when its subscriber count stalled, before it made the transition to having an ad-based tier.
In both of those instances, the drop in Netflix shares was caused by short-term pitfalls as the company transitioned to a healthier longer-term business model. And both instances proved golden buying opportunities.
Risks to the thesis
However, The Trade Desk isn't an automatic buy here. There is something suspicious about a company missing estimates for the first time after a very long winning streak, which could signal something has shifted competitively or in the overall landscape, despite Green's comments to the contrary.
My colleague Jeremy Bowman noted that mobile game advertising platform Applovin(NASDAQ: APP) recently crushed estimates and is now targeting non-gaming advertisers to insert into its ad tech platform. While Applovin targets mobile games and The Trade Desk targets connected TV, audio, and other digital ad formats, one could potentially see these two juggernauts clashing in the future as they encroach on the other's turf. So that's something to watch.
Moreover, The Trade Desk is still not "cheap" by conventional metrics. Even after its 50% retracement, it still trades at 90 times trailing earnings and 63 times forward estimates.
Now, on a non-GAAP basis, the stock trades at a more reasonable 42 times trailing earnings. That being said, stock-based compensation, which accounts for most of the difference in GAAP and non-GAAP earnings, should be regarded as a real cost. On the other hand, The Trade Desk's SBC barely grew in 2024, so hopefully that muted SBC growth will continue into the future as The Trade Desk grows.
All in all, The Trade Desk remains a hold right now but could be a big opportunity. Interested investors in this growth stock at a reasonable price should watch this space.
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Billy Duberstein and/or his clients have positions in Netflix and The Trade Desk. The Motley Fool has positions in and recommends AppLovin, Netflix, and The Trade Desk. The Motley Fool has a disclosure policy.
