The Nasdaq-100 Technology Sector index has jumped an impressive 44% in 2023 as investors have regained confidence in technology stocks. This can be attributed to multiple factors, ranging from cooling inflation, to a resilient economy, to new catalysts such as artificial intelligence (AI) that have opened up new growth opportunities for tech companies.
The Trade Desk (TTD 0.62%), which is one of the components of this index, has also delivered terrific gains of 41% in 2023. However, the company’s hot stock market rally came to a screeching halt following its third-quarter results, which were released on Nov. 9. Shares of The Trade Desk, which provides a programmatic advertising platform, fell 17% as investors pressed the panic button.
Let’s see why that was the case before checking why the latest pullback in the stock could actually be a great buying opportunity.
The Trade Desk falls on weak guidance
The Trade Desk’s Q3 revenue increased 25% year over year to $493 million, which was well ahead of the $487 million consensus estimate. Its adjusted earnings increased 27% year over year to $0.33 per share, beating Wall Street’s expectations of $0.29 per share.
However, management adopted a cautious approach while initiating the guidance, pointing out that “we have seen more macroeconomic uncertainty at the start of Q4.” That uncertainty can be attributed to headwinds such as strikes in the U.S. auto and entertainment industries, as a result of which advertisers are said to be cautious about their spending.
This explains why The Trade Desk anticipates its Q4 revenue to land at $580 million, at least. That’s well below the $610 million consensus estimate. The guidance points toward a year-over-year jump of 18% in Q4 revenue, which would be slower than the company’s growth last quarter. The Trade Desk delivered a 24% year-over-year increase in revenue in the same period last year.
Given that the stock was trading at a rich 23 times sales before its results came out, The Trade Desk needed to deliver impressive guidance in a bid to sustain its equally impressive stock market momentum. The stock fell since The Trade Desk couldn’t come up with the goods, but this looks like an opportunity in disguise for investors looking to buy a growth stock for the long run.
The bigger picture is still bright
The Trade Desk’s Q4 guidance suggests that the company is on track to finish 2023 with $1.92 billion in revenue, an increase of 22% from last year. While that will be slower than the 32% revenue growth the company delivered in 2022, it is still healthy. More importantly, The Trade Desk is set to grow at a faster pace than the digital advertising market once again this year.
It is worth noting that global digital ad spending could increase by 8.4% in 2023, according to media investment company GroupM, indicating that The Trade Desk is on track to grow at more than twice the pace of the market in which it operates. The Trade Desk’s outperformance can be attributed to the fast growth of the programmatic advertising market.
Market research firm TechNavio estimates that programmatic advertising spending is set to increase at a compound annual rate of 32% through 2027, adding nearly $434 billion in revenue. That’s not surprising. This technology allows marketers, advertisers, and brands to drive greater returns on their advertisement dollars, as they can buy ad inventories and optimize their campaigns in real time using a data-driven platform that The Trade Desk provides. These ads can be displayed across multiple channels ranging from connected television to smartphones to computers to improve audience targeting.
More importantly, The Trade Desk is using AI to further improve the effectiveness of its platform. All this explains why the company is expected to deliver revenue growth of 20% or more for the next couple of years as well.
Additionally, analysts are expecting the company’s earnings to increase at an annual pace of 24% for the next five years. That’s why investors can use the dip in The Trade Desk to buy the stock at a relatively cheaper valuation. The Trade Desk is now trading at a price-to-sales ratio of 17.7. That’s well below the company’s five-year average multiple of 27.
So, investors have an opportunity to buy a company that’s outperforming the market it is operating in and has a huge addressable market to tap following its latest dip. Doing so might turn out to be a solid long-term move, as The Trade Desk could turn out to be a top growth stock in the long run.
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.