Every investor has good days, bad days, and those that are just downright ugly. Yesterday (13 February) was the latter for my SIPP portfolio as one of my largest holdings — The Trade Desk (NASDAQ: TTD) — plummeted 33% in a single day.
Incredibly though, the stock’s still up 168% over five years, showing how well it’s performed historically. Nevertheless, this is a significant setback.
Should I buy more shares on this monster dip? Let’s take a look.
Uh-oh!
The Trade Desk’s platform enables programmatic ad buying, leveraging data to help brands and agencies reach target audiences more efficiently. For example, advertisers use The Trade Desk to place targeted ads on platforms such as Spotify or Roku.
The culprit for yesterday’s epic drop was the company’s fourth quarter. As soon as I read the report’s opening line, I had an ‘uh-oh’ moment: “The Trade Desk also announced an additional share repurchase authorisation, bringing the total amount of authorised future repurchases to $1bn.“
In my experience, a share buyback announcement at the start of a growth company’s report is rarely a good omen. It suggests that management anticipates a share price sell-off and aims to reassure investors by signalling confidence through buybacks.
My fears were confirmed four sentences later when CEO Jeff Green added: “While we are proud of these accomplishments, we are disappointed that we fell short of our own expectations in the fourth quarter.” Oh dear.
The company beat earnings’ forecasts but its own guidance was for quarterly revenue of at least $756m. It came up short, posting $741m.
That might not sound like a big deal. But this was the first time in 33 quarters as a public company that The Trade Desk had missed its own guidance. And Q4 was the Holiday season/US election, a period when retailers were expected to double down on advertising.
For the first time in eight years, we missed the expectations we set, and it was our fault.
Founder and CEO Jeff Green, Q4 2024 earnings call.
Softish guidance
Management blamed execution missteps in Q4, resulting in slower-than-expected adoption of Kokai, its new AI-powered ad-buying platform. That’s disappointing to hear, as the firm’s data-driven and should be perfectly positioned to harness powerful advances in artificial intelligence (AI).
Looking ahead, it sees revenue increasing by at least 17% ($575m) in Q1. While strong, that’s a slowdown from the 20%+ growth rates investors have grown accustomed to.
This highlights how growth stocks can sell off sharply when they don’t live up to investors’ lofty expectations every single quarter.
My move
Due to its high growth rates, the stock has always been pricey. Heading into the print, it was trading at a premium price-to-sales (P/S) multiple of 25. Even after the drop, the P/S ratio’s still 16.8. The risk with this high valuation is that if growth slows even further this year, there could be another sell-off.
Long term though, I remain bullish. The Trade Desk controls $12bn of ad spend in a $1trn global market. So the opportunity for further growth is massive.
I’ll see how the company gets on this year before committing any further money. But for investors wanting exposure to the fast-growing digital advertising market, the stock could be worth considering after this huge dip.
This post was originally published on Motley Fool
