There’s been no doubt about this one fact in stock markets recently; growth stocks have taken a massive hit.
As investors rotate into “value” and away from “growth”, it’s worth remembering that as long-term investors we want to be buying into companies that will shape our future.
In that sense, it was interesting to see digital programmatic advertising platform The Trade Desk Inc (NASDAQ: TTD) report solid first-quarter earnings on Monday and yet still have its shares sink a barely-believable 25% in response.
But for long-term investors, is this advertising pioneer still doing well and, more importantly, does it continue to have a long growth runway in front of it?
Solid growth but expensive
The Trade Desk provides a platform for ad buyers who can pick from hundreds of billions of ad opportunities per day.
Effectively, it allows advertisers to efficiently target where ads will be placed and through which channel they’re consumed.
It has proved an exceptionally profitable model. Over the past five years, The Trade Desk has grown its annual revenue from US$114 million in 2015 to US$836 million in 2020.
The company’s latest quarter saw continued growth as revenue was up 37% year-on-year to US$219.8 million, ahead of consensus expectations.
However, The Trade Desk shares were trading at a lofty price-to-sales (PS) ratio of 37x trailing 12-month revenue before its earnings release.
Clearly, the small beat on the top line was not enough to impress investors and its stock was punished.
Investors should remember that the stock is still up over 150% from its March 2020 low, even after Monday’s steep drop.
10-for-1 stock split
The Trade Desk also announced that it would be carrying out a 10-for-1 stock split, which would be effective from 1 June.
This will allow retail investors a much more affordable opportunity to purchase single shares of this fast-growing data-driven advertising platform given The Trade Desk’s stock price is currently over US$500.
The Trade Desk continues to thrive in a fast-growing ad market that is increasingly going digital. Based on data firm IDC, total global ad spending as of 2019 was a huge US$725 billion.
With the ability to increasingly measure and target ads for advertisers, The Trade Desk’s platform is becoming an indispensable part of their toolkit when deciding where to allocate ad dollars.
Focus on the business
If anything, The Trade Desk’s huge fall in the share price is a reminder that stocks do not always go up, no matter how great the business is doing.
In the company’s case, not much has changed. Around 88% of ad spending on its platform is from North America while 67% of all ad dollars globally are spent outside the region.
That gives long-term investors an idea of the potential growth left for The Trade Desk as it looks to surpass the US$1 billion annual revenue mark in 2021.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.