Shares of The Trade Desk(NASDAQ: TTD) got clobbered following the release of the company's fourth-quarter results on Feb. 12, dropping by a whopping 33% during the following trading session.
The programmatic advertising platform provider missed its own revenue guidance, and investors weren't impressed with its guidance for the current quarter either. Let's look at the factors that are weighing on The Trade Desk and consider whether the stock's plunge has created an opportunity for savvy investors.
Execution issues are dragging The Trade Desk down
Acknowledging The Trade Desk's first revenue miss in its 33 quarters as a public company, CEO Jeff Green pointed out that "a series of small execution missteps" weighed on its performance last quarter. On the earnings conference call, he elaborated:
Simply put, as you've seen before, as companies grow and become increasingly complex, they need recalibration to unlock new opportunities. We are recalibrating our larger company for an even stronger future.
He added that The Trade Desk has made four major changes in the past few months, including a structural reorganization and a change in its approach toward sales, with the goal of ensuring that the company remains focused on the long-term opportunities in the programmatic ad market. However, those changes were part of what resulted in its Q4 revenue coming in at $741 million -- lower than its guidance three months earlier for revenue of at least $756 million.
The company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also fell short of its expectations. Though the growth in its top line was a healthy 22% and adjusted earnings increased 44% to $0.59 per share, The Trade Desk's stock carried an expensive valuation, and to justify that, it needed to do much better.
Specifically, The Trade Desk was trading at a whopping 25 times sales and 157 times trailing earnings before its Q4 results came out. Considering that management's Q1 guidance points toward revenue growth slowing to 17%, it wasn't surprising to see some investors head for the exits.
Meanwhile, the company is anticipating a 10% decline in adjusted EBITDA this quarter. All this suggests that The Trade Desk's steep sell-off was justified. But is the stock now attractive enough to make it a buy, especially considering the huge addressable opportunity the company is sitting on?
Will it be a good idea to buy this big dip?
The Trade Desk was trading at expensive valuations before its results came out. However, it is now available at relatively cheaper levels.
It won't be surprising if investors are tempted to buy this tech stock now, even though it is still relatively expensive when compared to the Nasdaq-100's earnings multiple of 34 (using the index as a proxy for tech stocks).
That's because the programmatic advertising market is expected to jump more than tenfold over the next decade, generating $117 billion in revenue in 2034, per an analysis published by Polaris Market Research. The Trade Desk clocked $2.45 billion in revenue last year, which means that it controlled just over 22% of programmatic advertising, based on that market's estimated value of $11 billion in 2024.
If it controls a similar share after a decade and the Polaris forecast proves close to accurate, that would translate into a terrific jump in The Trade Desk's revenue and earnings. So, there is no denying that The Trade Desk indeed seems built for healthy growth in the long run despite the short-term hiccups that it may face this year.
The company has been using tools such as artificial intelligence (AI) to help advertisers improve their returns on ad dollars spent, which could open another solid long-term growth opportunity. As such, investors looking for a growth stock for the long run could consider adding some shares of The Trade Desk to their portfolios now, since it seems capable of regaining its momentum in the future.
Those who think that the stock is still expensive would be well advised to keep The Trade Desk on their watch lists, as further near-term drops in its stock price could bring it to what they'd view as an affordable level.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends The Trade Desk. The Motley Fool has a disclosure policy.
