"Be fearful when others are greedy and greedy when others are fearful."
"The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."
"The intelligent investor sells to optimists and buys from pessimists."
These statements by (in order) the wildly successful investors Warren Buffett, Sir John Templeton, and Benjamin Graham boil down to a simple concept: Buy low, sell high.
It's a simple concept but not so easy in practice. In reality, our emotions get in the way. No one wants to lose their hard-earned money, so many investors fall into the trap of buying on optimism and selling on pessimism -- or, in other words, buying high and selling low.
This doesn't mean every company is a great buy when its stock crashes. Some will never recover. The key is to look for terrific companies going through a brief rough patch that still have excellent financials and strong industry tailwinds.
The Trade Desk(NASDAQ: TTD) looks like one of these companies.
Why did The Trade Desk stock crash?
Management reported earnings on Feb. 12; as you can see below, the market was quite dissatisfied!
The earnings were not that bad (more on this below); however, guidance was light, and CEO Jeff Green announced a series of changes to right the ship. The company also fell short of its estimates for the first time in eight years.
There were four significant changes (you can read about them in full here), which I'll summarize.
The Trade Desk streamlined sales teams and clarified individual roles.
Management is focusing on internal efficiencies.
The company increased its resource allocation to brand partnerships, which is the fastest area of revenue growth now.
It moved to smaller, more nimble product development teams.
It seems clear that Green believes the issues are internal and not caused by the marketplace. These four initiatives seem like common-sense moves to become a more focused company and maximize the best-performing revenue streams.
The future is bright
Despite the hand-wringing over the results, guidance, and restructuring plan, 2024 was not the disaster one would expect from the 46% stock price drop since Feb. 12. Sales grew 22% year over year in the fourth quarter to $741 million and 26% in 2024 to $2.4 billion. This is an acceleration from 23% sales growth in 2023.
Operating income improved from $200 million in 2023 to $427 million in 2024, while diluted earnings per share (EPS) rose from $0.36 to $0.78. The company's cash and investments stockpile also grew to $1.9 billion from $1.4 billion, as it remained free of long-term debt.
The Trade Desk is in an enviable industry with strong tailwinds. The company provides programmatic advertising via the web, social media, and especially streaming television.
Programmatic advertising has tremendous advantages over traditional advertising on cable or satellite television. With programmatic ads, when a publisher has space to sell, it sends out a bid request, and a demand-side platform (DSP) like The Trade Desk bids on behalf of its clients based on predetermined metrics. The interaction happens in a fraction of a second.
This gives advertisers greater ability to target specific audiences, broad flexibility, and more data-driven ad campaigns. Marketing analyst Statista forecasts programmatic ad spending to increase from $595 billion in 2024 to $779 billion in 2028.
Streaming will likely continue to steal audiences from cable and satellite. The increase in live professional sports on streaming platforms will be another boost. Amazon has succeeded with NFL Thursday Night Football, and the rumor is that Netflix will push to broadcast NFL games on Sundays. What is great for streaming is excellent for The Trade Desk.
Is the stock a buy now?
The crash in the stock price has brought the price-to-sales (P/S) valuation near historic lows, as shown below:
The stock has not been this inexpensive based on sales since the major stock market indexes bottomed at the start of 2023. It's also undervalued historically based on earnings, where the average forward price-to-earnings ratio (P/E) since 2021 is 57, and it currently trades at 37.
The Trade Desk's turnaround probably won't be instantaneous; however, chances to buy terrific companies at bargain basement prices don't come along every day. The company posted respectable results despite missing guidance, it has a clear plan to improve and is financially sound, and it operates in a booming industry. This has the makings of a classic buy-low opportunity.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Bradley Guichard has positions in Amazon and The Trade Desk. The Motley Fool has positions in and recommends Amazon, Netflix, and The Trade Desk. The Motley Fool has a disclosure policy.
